With stock markets moving in tandem with a Drop Zone amusement park ride, and interest-bearing products paying next to nothing, many investors are wondering what to do with their RRSP investments this year – or even whether to make one.
“People are panicked,” says certified financial planner Sharon Rizzuto of Burgeonvest Bick Securities Ltd. in Grimsby, Ont. “If you gave them a risk profile before and gave it to them now, it would be entirely different.”
One of the reasons to make an RRSP contribution despite the uncertain investment conditions is the tax savings it affords, and that’s why Ms. Rizzuto advises doing so, especially if you don’t have a company pension plan.
RRSP contributions are deducted from your taxable income, so you’ll get a refund when you file your income tax. Ideally, you will use that refund to pay down debts such as a mortgage.
Investments held inside an RRSP grow free of tax. When you retire, most people’s incomes will be less than when they were working, meaning you can withdraw money at a lower tax rate than when you contributed and receive a refund.
To maximize the tax benefits, people have traditionally been advised to hold interest-bearing products, such as guaranteed investment certificates (GICs), inside an RRSP where the interest can compound tax-free, and to keep investments that incur capital gains, such as stocks, outside an RRSP, because capital gains and dividend income are already taxed at the lowest rate. But with GICs earning historically low interest rates now, conventional wisdom may not hold.
“Now maybe it’s the capital gains you want to shelter because it looks like that’s where the gains are going to be,” Ms. Rizzuto says.
But the stock market’s extreme volatility may have frightened many investors away completely. People who poured everything into mutual funds a few years ago are retrenching, putting whatever they do invest into “risk-free” products such as GICs.
“They think that at least they’re protecting their capital,” Ms. Rizzuto says. However, investing $1,000 in a one-year GIC will earn only about 1.5 per cent at the moment. By the time you pay registration and adviser fees you’re not earning anything and likely cutting into that capital, she notes.
Consider your time horizon – how long do you have before you need to draw on your RRSP funds – when determining what to do.
Many people make RRSP contributions with the idea that they can use the money down the road as part of a down payment on a home. The Home Buyers’ Plan (HBP) allows you to withdraw up to $25,000 in a calendar year from your RRSP to buy or build a house or condo. The HBP stipulates that your RRSP contributions must remain in the RRSP for at least 90 days before you can withdraw them, and generally you have 15 years to put what you withdraw from your RRSP back into it.
For these people, and others with a short time horizon, a fixed-income product such as a GIC is likely best, Ms. Rizzuto says. But if you are a young person saving specifically for retirement, she recommends going for capital gains and toughing out the market for the long term.
If you’re looking at putting RRSP funds into stocks for long-term gains, go back to basics, Ms. Rizzuto says. “We need to get back to the business of looking for individual companies, quality companies. … If you choose a business to invest in, do your homework to be careful that it’s a good business. Eventually it will come around, but you need patience.”
