Managed Money Reporter Newsletter — Issue 153, November 1999
Editors: Carl Spiess & Allan McGlade
It can sometimes be difficult to find all the money you want or need to put away at one time of year. Have you ever experienced a mad scramble to find enough money to make a last minute RRSP contribution? It's something that many of us have experienced at one time or another, but it doesn't have to be that way.
Consider setting up a ScotiaMcLeod Pre-Authorized Contribution Plan (PAC). With a PAC account you can make regular, automatic investments in one or more mutual funds for your RRSP or investment account. The contribution amounts can be as little as $100 per month and can be set up for a range of different periods (monthly, quarterly, etc.). Not only is this method of saving easy and relatively painless, but you benefit from the advantage of dollar cost averaging throughout the year.
What are the benefits of dollar cost averaging?
When you regularly contribute to a mutual fund, you are automatically purchasing more units of the fund when the price is low, and fewer units when the price high. Over time this can actually reduce the average cost of the units that you own, and it takes the guesswork out of trying to decide when is the right time to buy.
Consider if you bought units of Templeton International Stock Fund every month. If you refer to the graph below you will see that you would be averaging out your cost rather than trying to time the market, and hopefully hitting it at the low. Pre-authorized contributions or payroll deductions (if applicable) can help you save a little bit at a time rather than trying to come up with a large sum at the end of February. Another benefit is that it puts your money to work earlier, so that you can take advantage of the tax-free compounding available in your RRSP.
Contact us, or your employer, to see if you are eligible to do payroll deductions; if not, we can set you up with a 'PAC' plan. There are no fees to get involved.
Every year most fund companies allow 10% of the units that you hold to be redeemed free of any deferred sales charge. If there is a new fund you have been considering investing in, or you have been looking to rebalance your portfolio and maximize your foreign content, this option may be right for you. With the introduction of the new 100% RRSP-Eligible Foreign Funds that allow you to go beyond the 20% threshold, the free redemption may be just what you are looking for.
Give us a call and together we will see what funds meet your objectives and if this redemption can benefit you. Please note that if you have already redeemed or switched any funds in 1999 you may not be eligible for this until January 2000. Please contact us for more details
ScotiaMcLeod is now offering self-directed RESPs that can be held within our firm, effective November 1st, 1999.
For clients who have RESPs with us presently but are held at the fund company, these accounts will be eligible for transfer after the RRSP season.
How they work
RESPs enable you to make contributions now towards the cost of a child's future education. In some plans, you are able to name multiple beneficiaries in one account, so you could hold one RESP for your children, grandchildren, nieces or nephews. You can even name yourself as a beneficiary!
Are the contributions tax-deductible?
The contributions themselves are not tax-deductible, but the funds grow tax-sheltered in the plan until the beneficiary begins their post-secondary education.
Currently, you can make contributions of up to $4,000 a year, to a lifetime maximum of $42,000 over 21 years, per beneficiary (who is typically taxed at a very low rate, if at all).
The contributor may have their contributions returned to them at any time, tax-free, but they are not replaceable in the plan.
What happens when it's time for the beneficiary to make withdrawals?
When the beneficiary begins their post-secondary education and is enrolled full-time at a qualified institution, they can begin to withdraw.
These withdrawals are called Education Assistance Payments (EAPs) and it's important to remember that they are from the growth portion of the plan, and not from the original contributions. The original contributions belong to the annuitant (the contributor) during, and at the end of the plan. The beneficiary declares the withdrawal of the growth of the plan as 'other income' on their tax return.
Any other benefits?
The government offers a Canada Education Savings Grant. The grant pays out up to 20% of the first $2,000 in RESP contributions made on their behalf in any year, up until the year they turn 18 to a lifetime maximum of $7,200. The CESG can be invested along with the contributions, and can be used in the educational assistance payments paid out to the beneficiary once they are pursuing higher education, however, any unused CESG must be repaid to the government
Are they right for you?
There are two main factors to consider when determining if RESPs are the right product for you.
It's that time of year again! The government of Canada is releasing its newest series of Canada Savings Bonds and Canada Premium Bonds available for purchase. Please contact our office for rates and availability.
Although C.I. Mutual Funds and BPI Mutual Funds have merged, switches are not yet available between the two fund families. There have been fund manager changes to coincide with the recent merger; they are as follows:
Other Fund News
ScotiaMcLeod is a division of Scotia Capital Inc., member of CIPF.
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The Spiess McGlade Team is a personal trade name of Carl Spiess and Allan McGlade.