Tax Return for 2006 & RRSP

It is time to get ready for the tax return 2006. The deadline date is 31 March 2007. I have to organize all the relevant receipts and documents first and then get a Quick Tax Software and have the job done before the due date.

As I was gathering the relevants papers from my wife and daugther, the questions about RRSP and savings are raised by my daugther. This is the question my daugther asked me last evening. She wants to start saving money. In what way she can maximize her saving? She asked me also about RRSP an other alternatives.

If she does not have plenty of disposable money my suggestion to her is RRSP in Canada and people in the USA they have the IRA or 401K.When we buy RRSP we are in fact buying a tax shelter which is legally permitted by the Canadian government. The money we deposit inside the RRSP is allow to grow tax free until it’s taken out. Here are a few problems with a RRSP. The first is the Canadian government only allow you to put no more than 18% of your income or $16,500, whichever is less into a RRSP. The second problem is the money is subject to income tax when it’s taken out. A good way to start is by automatic monthly

deposit through the bank.

If she has plenty of disposable money, my recommendation to her is Using Life Insurance To Tax Shelter her Money’

Not many people know that life insurance can tax shelter your money. This tax shelter allows your money (investments) to grow free of tax similar to RRSP. Life insurance proceeds are passed tax free to your beneficiaries. That’s good for your beneficiaries.

What if you want the money? All life policies except term insurance have a cash surrender value that you get if you give up the insurance. If you take the cash, your beneficiaries get nothing and your money in the policy less the relevant administration fee and the withholding tax would it a very bad deal. It would be even worse if you have to take out this money at the early years of the policy. However, there is a way around this.

Lfe insurance policies (except term insurnace) are made up of two compartments, i.e., insurance & investment. For example, a 28 year old non smoking young lady has to pay $2149.20 a year to get $1 million of life insurance coverage. If she just put $2,149.20 into her plan, she will have insurance only as the income money just enough to fill up the insurance compartment. Anything above that amount then goes into the investment compartment. The key here is this investment compartment. While the money is inside the policy, it is allowed to grow tax free, just like a RRSP. Many investors put way more money than they have to into their policy. To prevent this the Canadian government sets limits on the maximum premium you can pay into a policy. Hence, your contribution not exceeding the government set limits still keep its tax shelter status.

For the above case, I make reference to Manulife Financial ’s Security UL, the maximum is $20,743.95 a year. The higher her insurance needs, the higher the limit. Let’s assume that the above put $20,000 a year into her policy for 5 years and then stops after that. After paying for insurance cost the rest will go into the investment, where it will grow tax free. If we assume an 6% yearly rate of return the policy will have a cash value of $575,247 and total death benefit of $1,575,247 when this 28 year old female reaches 65. If she takes the cash from the cash surrender value, it gets taxed and she loses the death benefit. Is it possible for her to take the cash out, keep the death benefit and not pay taxes? The answer is yes. There is a way around.

The way to solve this scenario is by borrowing against the cash value of the insurance policy. A bank will lend up to 90% of the cash value on an insurance policy. So our investor can borrow up to $517,722 from the bank. She may of course use this money to buy a new home and anything as she feels right. The money would not be taxed because it’s not income. Hold it, how does the bank get its money back? Yes, when she dies the death benefit will pay off the bank loan plus accrue interest and any money left over will go to her beneficiary

Thus we have an investment strategy completely sheltered your money from tax, allows you to take money out of the plan tax free, and allows you to transfer your estate to your heirs’ tax free.

One last piece of advice for her and my readers is you should seek out the detailed advice of an experience financial planner before proceeding.

Reference:

Manulife