Monday, May 4, 2009

Out of RRSP contribution room?

The Registered Retirement Savings Plan (RRSP) is probably the single best tax shelter available to Canadians. You can deduct your contributions from your income, and you are able to shelter your earnings from taxation for as long as they remain inside the plan.

But what do you do if you've filled it up and have no more contribution room? It's a problem. But what a nice problem to have!

While it's difficult to think of another savings vehicle quite as attractive as the RRSP, the good news is that there are other tax-advantaged savings options available to those who have already maxed-out.

Universal Life Insurance
Universal life insurance is perhaps best described as a life insurance plan built around a tax-sheltered, savings account. Every month, the base insurance premium is "billed" to this savings account. Any amount that remains in the account after this minimum charge has been paid can be invested however you choose, and the earnings accumulate tax-free for as long as they remain inside the policy.

Mortgage Debt
Now that your RRSPs have been topped up, consider the benefits of making an additional mortgage payment. Most lenders will allow you to make prepayments to a maximum of 20% or 25% of the original loan, and the savings can be significant. For example, a $10,000 prepayment on a $150,000 mortgage at 5% with 20 years remaining would save you $15,399 in interest. There aren't many other investments that can generate an immediate 150% after-tax return!

If you'd like to discuss these or any other tax shelter opportunities in greater detail, please do not hesitate to contact me at 416-806-5478 or by email at

Severance package options

Hopefully we'll never need to manage through such an unpleasant contingency, but there is always a chance that you or someone you love might face a layoff in the future, particularly during this time of economic uncertainty.

You might already be acquainted or all too familiar with the vexations that come with being dismissed suddenly. When this happens, or at any other time you receive news that affects your financial plan, please contact me immediately. Not only is it your responsibility to let me know when there are "material changes" to your plan, it is usually imperative that we manage your cash flow, investments, benefit plans and the tax implications that usually accompany employee severance packages.

Although receiving a large or modest severance package can help soften the blow of losing your employment, the sudden influx of cash can have serious tax consequences if not managed properly. In some cases, it might even be beneficial to negotiate with your employer and arrange to receive severance payments after January 1.

Your life and health insurance benefits also need to be addressed rather quickly — often your group insurance can be converted into an individual policy without the need to provide medical evidence, but there might be only a short period of time to do so. Unless you are in excellent health, this could be your only chance to obtain sufficient insurance coverage at a standard rate.