We all work hard for our money. In return, our money should work hard for us. One of the best ways to do this is by taking advantage of the tax benefits that come from contributing to a Registered Retirement Savings Plan (RRSPs).
For many Canadians – especially those without a company-sponsored pension plan — RRSPs will form the cornerstone of their retirement. This is the perfect time of year to give your RRSP the attention it deserves and to reap the reward of tax-sheltered growth. Here are a few tips to help you make the most of this RRSP season:
Do your RRSP homework
Before you can decide how much to contribute to your RRSP, you need to know some basic information. Start with your 2019 Notice of Assessment. This will show exactly how much RRSP contribution room you’ve accumulated. Whatever you do, don’t exceed your limit, as you may incur interest penalties from CRA.
Next, you’ll need to factor in any other RRSP or pension plan contributions you’ve made, as these will reduce your allowable contribution room. Then consider your marginal tax bracket: making RRSP contributions for a year when your income is low may not be worth it; you might be better off waiting until your income is higher, so the contribution generates a bigger refund. If all this seems overwhelming, your accountant or your financial advisor can help you do the math.
And like any homework assignment, there’s a deadline. You have until March 2nd, 2020 to contribute funds to your RRSP and have the contribution count for the 2019 tax year.
1. Contribute now; invest later
If you haven’t got time to focus on this task right now, don’t feel pressured to make a rush decision. You can always contribute before the upcoming deadline, but not invest the money immediately. Tell your advisor to park the funds in something liquid like a Daily Interest Savings Account. You can always re-direct the fund later when you have more time to make a thoughtful and informed investment decision.
2. Focus on the plan, not just the purchase
Don’t limit your thinking about RRSPs to once a year when it’s time to contribute. Too many people focus on the immediate tax savings of a contribution, rather than on the need for a long-term retirement savings strategy. They’ll contribute faithfully to an RRSP every year but have no idea when they can retire or if their savings will be enough.
3. Everything starts with a plan
Make sure your financial advisor completes a proper retirement forecast that incorporates your personal goals and current circumstances. This way you’ll know exactly how much you need to contribute to stay on track, as well as what sort of investment will generate the necessary returns to achieve your long-term retirement objectives.