Top 10 RSP Strategies
It seems that every year thousands of Canadians rush to make a last minute Registered Retirement Savings Plan (RRSP) investment before the inevitable deadline. If this sounds like you, how do you know the decisions you are making are right 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," according to Jane Olshewski, Manager, Advanced Financial Planning Support at Investors Group. "But there are some simple strategies anyone can put into place that will help them get the most out of their RRSP."
Investors Group suggests these essential RRSP strategies:
1. Contribute early
Make your contribution as early in the year as possible. Tax deferred compounding makes those early dollars grow dramatically.
2. Contribute the maximum
Take advantage of compounding and get the maximum tax break by contributing your limit. You can invest up to 18% of your previous year's earned income, to a maximum of $19,000 (less your pension adjustment or past service pension adjustment) for 2007. Remember, while you can "carry forward" any unused contribution room to subsequent years (until after 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 the RRSP contribution 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. Remember, it's a good idea to increase your monthly contribution if your income rises.
4. Consider borrowing
Don't let tight cash flow deter you from considering an RRSP loan to top up your contribution. Although you'll pay interest on the amount borrowed, the compound growth of your money over the long term can far outweigh the interest cost. Plus, you can use your tax refund to pay off a substantial portion of the amount borrowed.
5. Invest in 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tax deduction, but the money in the RRSP will be taxed in the other spouse's hands, usually at a lower rate, when it is withdrawn. This is an excellent way to income split in retirement and reduce your combined tax rate.
6. 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-to-day 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. Consider diversifying into growth oriented securities - such as equities and equity mutual funds - to earn returns that can protect you against inflation and provide long-term growth potential.
7. Resist the 'dip' into your RRSP
Usually there is nothing to prevent you from accessing the investments 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%, 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 on your investments that was lost when you did the RRSP withdrawal.
8. 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.
9. Designate a beneficiary
Consider designating someone to whom the plan assets should go 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 your Investors Group Consultant about the tax and other consequences of designating a beneficiary to your RRSP. This strategy does not apply in Quebec.
10. Get expert help
The services of your Investors Group Consultant are essential to help you make the right long-term investment decisions. Together, you should review your plan at least once a year to make sure that it is still on track with your long-term goals.
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This article, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.
© Copyright 2007 Investors Group. All rights reserved. Do not reproduce without the express written consent of Investors Group
