Deborah Baic/The Globe and Mail
PLANNING FOR THE WORST
More than a retirement stash
Managing your RRSP well during unsettling times can mean big tax savings
RRSPs aren't just about having the money needed to enjoy your golden years. They're also about making sure there's a rainy day fund available to weather life's unexpected storms.
This year, many Canadians appear to be headed straight into the eye of a hurricane. The Conference Board of Canada is predicting 175,000 jobs will disappear in 2009 as the corporate world downsizes in the face of a global economy in shambles. That's on top of the more than 100,000 jobs lost in the final two months of 2008.
While retirement savings aren't the first concern when the pink slips start flying, putting in place an effective strategy for your registered retirement saving plan during such unsettling times can mean huge tax savings, and a better financial future, in the longer run.
In the shorter term, it may also allow for breaking into RRSPs for emergency cash needs - and doing it guilt-free.
"It is not a crime to take out of your RRSP money - don't think of it as if it's locked away," says Ted Rechtshaffen, president and chief executive officer of TriDelta Financial Partners in Toronto and a certified financial planner. "The important thing is you want to look at your RRSP portfolio and see how it is managed."
This may mean making sure an RRSP is invested more conservatively for the tough times. If withdrawals will have to be made, it's best to take them out of safe havens such as cashable guaranteed investment certificates (GICs) or money market funds, rather than out of beaten-down stock holdings.
"If you think you might be drawing from an RRSP in the next two years, you need to move it at least a notch lower in terms of risk," Mr. Rechstaffen says.
Jeff Schulman hasn't had much need to change the composition of his portfolio since being laid off as a vice-president of operations for a Markham, Ont.-based manufacturing lab in early December.
Mr. Schulman was a pretty safe investor to begin with, but he says reviewing his RRSP strategies heading into his job loss has helped calm his anxiety about money matters. This month, he even treated himself to a couple weeks of holiday time down south.
"Having the plan in advance was the key," says Mr. Schulman, 51, a resident of Toronto. "I don't feel it makes me feel better about the situation, but it does leave me in a position where I can say I have another X amount put away that will last me X amount of time. And there's provisions not only for retirement, but using it in a rough patch of life if necessary."
Mr. Schulman has not yet made withdrawals from his RRSP, but he has halted automatic contributions into his plan. He is awaiting final settlement of his severance package before deciding on what steps to take next.
"Other than if a settlement comes in, and I'm going to put some of it directly [into the plan], it's going to be tough to get the RRSP going again, especially if the market doesn't change," Mr. Schulman says.
Severance can be key
Severance payouts can be key to RRSP strategies during a job loss, Mr. Rechtshaffen notes. Often they are paid out as a lump sum, which bumps up a person's annual income for the year in which he or she is laid off.
Making a good-sized RRSP contribution in that year to maximize a tax refund is often the best course of action, especially for those in a high-income bracket. Then, in the following year, when income will likely be considerably less because of time spent without a salary, money could be withdrawn from the RRSP at a much lower interest rate.
For someone who was in the highest tax bracket in 2008 and is laid off in early 2009, that might mean getting close to 46 per cent of his 2008 RRSP contribution back as a tax refund. If the person's income turns out to be very low in 2009 because of unemployment, he might be able to withdraw the money from the registered plan and be subject to paying only 15 per cent or less tax on it, Mr. Rechtshaffen explains.
"A general RRSP rule that applies to anyone is: If you have good income, you should be trying very hard to contribute to the RRSP that year. If at any time you have a year where your income is very low, you should consider withdrawing money out of your RRSP, because taxes will be super low," he says.
"You might as well take it out and use that same money next time your income is high and re-contribute to get the refund."
Preparing for layoff
Mr. Rechtshaffen also believes it's important for homeowners who think they may soon be out of a job to make sure they have been approved for a secured line of credit. It will be a lot more difficult to get that credit once out of a job, and having access to a low-interest loan could prevent untimely withdrawals from investments.
"You don't want to be forced to sell stocks that you think are really low-priced at the moment. The line of credit, if you can do it, buys you time," Mr. Rechstshaffen says.
Laurie Stephenson, a certified financial planner with Stephenson Daigle Financial in Halifax, says any person feeling vulnerable to a layoff should conduct a thorough review of their financial affairs with an adviser.
The first step to being prepared, she believes, is paying off non-tax-deductible debt, or at least consolidating debt at the lowest possible interest rates.
Having RRSP money at your disposal can even help turn the dismay of a job termination into something positive, Ms. Stephenson says.
Last year she had a client who lost his job, but transferred $20,000 from his RRSP into a Lifelong Learning Plan. Under the federal program, which requires enrolment in a full-time education institution, the RRSP money can be shifted without being subject to income or withdrawal taxes (although it must be paid back into the plan over a period of up to 10 years).
"He's had a chance to retool and he went back to school," Ms. Stephenson says. "It's been a blessing for him."
Special to The Globe and Mail