When it comes to investing and saving on taxes, you have options. Within your financial planning process, you should look at all of them and select those that work best for your unique situation. But there is one investment option that’s a no-brainer. The Registered Retirement Savings Plan (RRSP), since being introduced 53 years ago, has become the basic foundation of almost every financial plan. RRSPs have stood the test of time as the best tax-saving, incomebuilding vehicle for most Canadians.
Here are the keys to making the most of your RRSP opportunity.
• Contribute to the max Always make your maximum allowable contribution each taxation year to get the most in immediate tax savings and to maximize the potential long-term growth of your RRSP investments. You’ve still got some time to contribute for 2009 – the deadline is March 1, 2010 – and you’ll find your maximum allowable contribution room on the Notice of Assessment sent to you from the Canada Revenue Agency (CRA) after filing last year’s income taxes.
• Contribute regularly Making automatic monthly contributions to your RRSP is much more rewarding than contributing a lump sum once a year. Here’s how: By investing $250 regularly each month at a compound rate of return of 8%, you’ll have $372,590 in your retirement nest egg 30 years from now.* But if you wait until the end of each year to invest a $3,000 lump sum, you’ll have only $339,850. By investing monthly, you’ve added $32,740 at retirement without contributing a dollar more.
• Play catch (up) If you have unused contribution room, fill it up as soon as possible for additional tax savings and longer-term tax-deferred, compound growth. You can fill your unused contribution room in a single year or over a number of years until you reach age 71.
• Borrow to save An RRSP loan can be a smart way to maximize this year’s contribution or to play catch up on your past contributions – but you must get the loan at a low interest rate and pay it back as quickly as possible. A best practice: Use your RRSP tax savings to pay off the loan.
• Spousal savings A higher-earning spouse can contribute to an RRSP for the benefit of his or her partner and enjoy a tax reduction on the contributions.
There are other RRSP strategies that can work for you – the right ones, incorporated into your overall financial plan, will help you save on taxes every year, retire with more and enhance your estate. Talk to your professional advisor about what’s best for you.
* The rate of return is used only to illustrate the effects of the compound growth rate and is not intended
to indicate future returns on investment.
John Scholl B. Mathematics, CGA, Consultant - Investors Group Financial Services Inc.