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THE HERALD Wednesday March 13 1M1 Page 17 Money Matters- New RRSP rules will affect your tax returns Recent articles about the suc cess of the season hinted that it was not as suc cessful as some of the financial institutions that were interview ed had hoped for Ore reason is that we are in a recession and many jobs have been lost and for those still employed overtime has been cut Many people not affected by the economic downturn have been conversing cash due to all of the bad news overload But economic downturns have a way of ending and this one will surely end and none too soon for many This year is the first year of a major change in the rules for RRSP contributions It is impor tant first to understand them so that they can be used to each tax payers advantage and second to reflect on why the Federal Government has made these changes First the contribution for 1991 is based on of your 1990 earned income minus the PA pension adjustment in Box of your 1990 for members of pension plans Earned income Is the total of salaries commissions net business income net rental In come certain royalties alimony payments received SUP in come and research grants less business losses rental losses and alimony payments made People earning more than will be able to contribute more to build a bigger nest egg People earning less who may ac tually see their contribution limit go down should do everything possible to contribute up to their limit It may be a long time into the future before they realize the wisdom of making that decision This means that most people except those on commission or with business or professional in come know right now how much they can contribute to their for 1991 If you have not been able to save to make the maximum contribution in the past it will be just as hard or harder in the future Second our government is try ing to tell us that they are not go ing to be able to fund a satisfac tory retirement income in the future so they are encouraging Canadians to increase their retirement savings The fact that they are allowing contributions to increase by per year until 1995 and by the rate of inflation thereafter means that the government knows that inflation is going to be with us for a long time The government is also allowing taxpayers if they miss making the full contribu tion in any given year to carry forward the unused contribution with certain restrictions for up to seven years One of the most dangerous aspects of this carry forward pro vision is simply that it will tempt people to defer RRSP contribu tions unnecessarily Readers of this column will realize the pitfall Cashing RRSP costly source of extra money By RJck Bates CA Many people are losing their jobs during this recession If it happens to you and you are tempted to dip into your registered retirement savings plans the best advice is not to do iL Sometimes there are alternate sources of money The cost of withdrawing funds is very high Suppose you arc and withdraw to tide you over until you have a job If you left thatmoney in and it earned 12 per cent a year it would to 85000byuietime you are 65 Even if you withdrew itasalump sun arid paid tax in the highest would still have more than 40000 That is what you would forgo In addition the 5000 withdrawn is subject to tax of about assumingyouwiUbcinalowcrtax bracket next year The big advantage of an is less that it saves you tax but that it defers tax on the money contributed and on the income earned in the fund Rather than dipping intoanRRSP consider If you do not intend to return to work you canchooseioannuitize all or part of your RRSPs and be gin receiving income from a life annuity Providing you are 60 or more when you do this you are entitled to a 1 7 per cent tax credit on the firstSlOOOayearof annuity income If you arc in danger of default ing on your mortgage but you have worth at least as much as the mortgage you can employ your funds without with drawing money This is done by having your self- administered RRSP hold the mortgage You would be able to do this only if your mortgage is coming due and you could pay it off without penalty The mort gage to be held in your must be insured There are also the usual fees involved in setting up any mortgage In addition a mortgage held by your RRSP must be at a normal market rale so there is no advan tage there The advantage is that you would be able to extend the amortization period to 25 years and thus red payments Before choosing either of these alternative strategics it would be wise to talk withafinancial adviser For CAs advice on TV sec Your Wealth available on broad cast channels in Ontario and on satellite across Canada or Money in the Bank on your community cable channel Moneycare is general financial advice by Canadas chartered accountants Rick Bates isa pro fessor at the University of Guelph Correction A picture featured on Page in last weekends Herald Outlook featuring the release of a red- tailed hawk incorrectly named Park School as sponsors of the release It was actually Harrison Public School that worked hard to raise money to help save the hawks life The Herald regrets the error ITS YOUR MONEY J Rocket of procrastination unless there is a very good reason The over riding fact of saving for retire ment is the critical of time and the magic of compoun ding rate of return in building retirement savings These new rules will allow most Canadian taxpayers to plan contributions right now The cornerstone of financial planning is to save a part of what you earn or to pay yourself first and many finan cial writers agree that of your gross earnings is the minimum target wise people should save to achieve financial independence Previously we have discussed the fact that the assets most Canadians have at retirement are their house car insurance policy and pension plan and these are things that have been acquired by systematic deductions from the paycheck Why not plan to maximize retirement savings and the finan cial independence that goes with it the same way The easiest way to do this is to arrange a cheque into your each month And the way that we think is best is to do this in a mutual fund Over the long term equity mutual funds have provided a better return than most other investments The main reason for choosing a mutual fund is that it offers pro fessional management of your money You can choose from many types of funds from con servative money market or funds to bond funds real estate funds balanced funds or equity funds A comparison of a 10 invest ment with an actual mutual fund using regular monthly savings versus a Dec contribution each year for the last 23 years shows two things First the mutual fund had achieved a return that was of the value of the 10 investment and se cond the monthly saving option in either investment resulted in a to greater value after 23 years than annual contributions What wasnt shown was that it probably was a whole lot easier to save monthly than to wait until the last minute and hopefully have all the money at hand Why not calculate your max imum allowable contribution for divide it by 12 and start your saving the easy way For a free booklet on RRSPs by Installment and charts compar ing an actual mutual fond with a Investment by monthly and annual contributions over the last 23 yean contact Peter C Maswm MBA Regal Capital Planners Ltd Drive Georgetown Ontario or phone 8777216 Paul J Rockel is be author of the best seller Why I Invest In Mutual Funds and President of Regal Capital Planners Ltd GreatDeals On If youve taken out a car loan within the last two years you should consider switching your existing loan to a lower rate at Municipal Trust And moving your business to us is easy Phone us today to compare your current loan rate to Municipal Trusts car loan rate Make an appointment with our branch manager who will then take care of all the details Its that Switch your car loan to Municipal Trust The word is that Municipal Trust has some of the best car loan rates in town And the time to deal with us couldnt be better Lets talk today about your loan tradein For example on a low srlth a three year and ail annual rate of 120 the monrhty payments would be and con of me loan Interest rata subject to change loans and rates era subject to our credit approvals and regdar credit terms municipal trust Over 4 billion in assets 26 branches across Ontario GEORGETOWN 28 Main St S 8734077 Gary Elliott