It seems that every year thousands of
Canadians rush to make a last minute Registered Retirement Savings Plan (RRSP)
contributions before the inevitable deadline. If this sounds like you, how do
you know that the decisions you're making are the right ones for your financial
future? It's important to remember that an RRSP should be individualized and
must fit well with your own personal financial goals and plan.
The 2015 contribution deadline is February 29, 2016.
1. Contribute early: Make your contribution as early in the year as possible. Tax-deferred compounding make those early dollars grow dramatically. Early in life, and early in the calendar year; both make a positive difference.
2. Contribute the maximum: Take advantage of compounds and get the maximum tax break by contributing your limit. In respect to 2016, you can invest up to 18% of your 2015 earned income, with a maximum of $25,370, less your pension adjustment or past service pension adjustment for 2015. Remember, while you can "carry forward" any unused contribution room from subsequent years (until age 71), you can never replace the lost growth opportunity.
3. Invest monthly: Many investors find it easier to reach their annual RRSP maximum by making contributions every month. You may find it easier to have your RRSP contributions automatically deducted from your bank account each month, or you may choose to belong to a group RRSP and make your RRSP contribution by payroll deduction through your employer.
4. Contribute to a spousal RRSP: A spousal RRSP allows the spouse with the higher income to contribute to an RRSP owned by the lower-income spouse. The spouse with the higher income takes the immediate tax deduction, but the money in the RRSP should be taxed in the other spouse's hands, usually at a lower rate, when it is withdrawn later into retirement. This is an excellent way to income split in retirement and reduce your combined tax rate.
5. Diversify: Different types of investments react differently to economic events. By diversifying your portfolio and holding various types of investments, you protect yourself against the day-today fluctuations in any one category. To achieve long-term growth you should diversify. Some investors limit themselves to fixed-income investments. The biggest danger with conservative type investments is inflation which can erode your purchasing power. If this sounds like you, consider a small amount of diversifying into growth oriented securities-such as equities and equity mutual funds-to earn returns that could protect you against inflation and provide long-term growth potential.
6. Resist the 'dip' into your RRSP: Usually there is nothing to prevent you
from accessing the money in your RRSP - but consider the consequences before
you do so. First of all, withdrawals attract tax at your marginal tax rate. Tax
withholding at the time of the RRSP withdrawal may be as low as 10%, or as high
as 30%, but you should determine how much more tax you'll have to pay when you
file your tax return. Secondly, you cannot restore the lost contribution room.
The amount you can contribute to an RRSP in your lifetime is limited and a
withdrawal erodes some of this potential.
Special circumstances can help you access
money in your RRSP without these consequences. The Home Buyer's Plan and Life
Long Learning Plan allow tax-free withdrawals with the ability to
re-contribute. However, even in these plans there is no ability to replace the
tax-deferred growth that was lost when you made the RRSP withdrawal.
7. Consolidate your investments: If you are the type of investor who
doesn't want to spend a great deal of time managing several plans, you may want
to consolidate your investments into one portfolio. Yes, you should have a
diversified portfolio of investments working for you, but you can usually
combine them under one RRSP umbrella. This strategy also means you will get one
consolidated statement, which may make it easier to track your plan.
8. Designate a beneficiary: Consider who should be designated to
receive the plan assets in the event of your death. Without a designated
beneficiary, the account will go through your estate and be subject to probate
and other fees. You should talk to us about the tax and other consequences of
designating a beneficiary to your RRSP. Who you appoint as beneficiary is also
very important, as there are different rules depending on if it is a spouse or
other party. This strategy does not apply in Quebec.
9. Get expert help: We are here to help you make the right
long-term investment decisions. Together, we should review your plan at least
once a year to make sure that it is still on track with your long-term goals.
10. Have a Plan: Investing, whether in an RRSP or
non-registered, is part of a financial plan, but it is important to clearly
understand that investing alone is not a plan. If we have yet to work together
to build your personal financial plan, call us today to get the ball rolling
towards achieving your retirement and other financial goals.
Do you have questions about your RRSP? Contact us today.
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