five REASONS

… YOU SHOULD MAXIMIZE CONTRIBUTIONS TO A PENSION PLAN

You don’t expect gifts from tax collectors, but pension plans wrap savings and investments with surprising benefits. Yet many people eligible to use pension plans don’t. A survey by online financial service company ING Direct found that 65% of Canadians eligible to use RRSPs and similar company pension plans either didn’t have a plan or made no contribution to plans in 2012. If you don’t use pension plans, you’re missing sure bets. Many pension plans are defined-benefit plans typically offered by governments and big companies which spell out exactly what an employee gets in retirement. More employees are in definedcontribution plans. For the selfemployed and everyone else too, there are RRSPs. The advantages are huge:

1 Mortgage paydown with potential capital gains.

You can use tax refunds from money contributed to RRSPs to pay down your mortgage. That’s a good investment. Money going into a principal residence can grow with the value of the home and, when the home is sold, the gains are tax-free.

2 You can get a lot of growth in defined-contribution plans without any taxes.

With no taxes to drag down growth, money builds up quickly. The larger the contribution, the greater the amount of tax-free growth.

3 Cheapest home loans you can get.

You can use money you put into RRSPs to bankroll a down payment on a home through the Home Buyers Plan. The money has to be paid back over 15 years, and it’s interest free. The money you borrow from your RSP can generate taxfree capital gains in the home you buy.

4 Free student loans.

You can use money in an RRSP to finance education through the Lifelong Learning Plan. Money taken out has no interest charge but has to be repaid over 10 years. It’s much cheaper than conventional student loans. Money can be used for study for the employee or a spouse. You can’t take more than $20,000 out, but once the money is repaid, you can do it all over again.

5 Instant profits with matching plans.

If the employer in a company pension plan has a matching program, then what you put in produces an instant profit in the amount of the match. So a $500 contribution with a 100% match turns into $1,000 immediately. Even if it’s a 50% match, the immediate gain is tough to equal.

* Be cautious. Taxpayers in high brackets approaching 50% who invest in assets that produce capital gains, only half of which are taxed, or Canadian source dividends from public companies, which get a roughly 30% boost via tax credits, might skip the pension detour.