No matter what’s happening in the markets, a Registered Retirement Savings Plan (RRSP) is still one of the best ways to save for retirement. You get tax benefits plus the magic of compound interest working for you. So here’s how to make the most of your RRSP.
If you act on only one idea here, make it this one. The difference between retirement success and failure isn’t how much money you make or how smart you are, but how well you conquer the all-too-human tendencies to procrastinate and under-save. Automatically route smaller, regular contributions from your chequing account to your RRSP. You’ll get the advantage of dollar cost averaging, you’ll probably save more and you won't be scrambling to meet the RRSP deadline.
Save the max
Take full advantage of RRSPs by contributing your maximum. If you don’t have the money, consider an RRSP loan or using a line of credit. You'll pay interest, but the compounding growth of your money over the long term may far offset the interest costs. Another smart move is to use your tax refund to pay down the amount you borrowed.
Make your contribution as early in the year as possible instead of leaving it until the 60th day of the following year when the RRSP deadline is looming. You’ll benefit from up to 14 extra months of tax-deferred compounded growth.
Use up your carried forward contribution room as soon as possible. If you can’t catch up in one lump sum, consider borrowing. Check the Notice of Assessment sent to you by the Canada Revenue Agency to find your unused contribution room.
Save for your spouse
If you’re the family’s higher income earner you can invest some or all of your contributions in your spouse’s RRSP and claim the tax deduction. The big benefit comes at retirement when more equalized nest eggs can reduce your combined tax bite and mean more cash to live on.
Name a beneficiary
If you don’t name a beneficiary your RRSP will be considered part of your estate and be subject to probate, taxes and other fees. In some cases that can reduce its value by almost 50%. If you name your spouse or a dependent child/grandchild as the beneficiary your RRSP transfers to them tax-free.
It’s practically the universal law of saving—start early. You’ll get time and compounding working for you. That can make a big difference to how much you need to save. A person making $50,000 who wants a retirement income of $40,000 needs to put aside about 8% of their salary each year if they’re starting to save at age 25, but 22% if they’re starting at age 50.
Whether you’re new to investing or a seasoned veteran, it’s always a good idea to get professional advice. So speak to a wealth advisor who can provide you with an expert’s insight and help you make informed decisions about your RRSP.
Talk to an advisor about your specific situation.
Servus Wealth Strategies Ltd. is a subsidiary of Servus Credit Union Ltd. offering financial planning, life insurance and investments. The information contained in this article is provided as a general source of information and should not be considered personal tax advice or investment advice.