Money Management Newsletter: RSP
Tips and more to help you make the most of
It's never too early to plan for a successful
retirement. Just take some timely advice, and...
1) Start early
Time, money and tax savings are an unbeatable combination. For example,
if you contribute $200/month into your RRSP from age 20 on, your $108,000
investment by age 65 will have grown to $527,031, assuming a 6 per cent
annual rate of return. If you wait until age 30 to begin, and increase
your contribution to $300 a month, the value of your total $126,000 investment
at age 65 will only be $414,097 assuming the same rate of return.
2) Don't wait until the
final deadline date
Give your money an extra year to earn tax-sheltered interest. If you contributed
$1,000 to your RRSP at the end of last year and continued to make end
of year contributions for a total of 20 years it will grow to $36,786
at a 6 per cent rate of return. If you had contributed the same sum in
January of last year and continued to make January contributions for the
same number of years your RRSP total would be $38,983 assuming the same
rate of return.
You can contribute to an RRSP up to 18 per cent of your earned income
from the previous year (minus certain adjustments), subject to a dollar
maximum. ($16,500. for the year 2005) From 1991 on, any unused RRSP contribution
room can be carried forward indefinitely. Your yearly notice of assessment
from Canada Customs and Revenue will advise you of this amount. This is
a terrific opportunity to save taxes and sock away some money. Do it now
if you can, before the government changes the rules again!
A mix of foreign and domestic fixed income investments as well as equity-based
investments, including precious metals, will protect you over the long-term.
Review your portfolio annually to maintain both the asset mix and foreign
content component. Also, keep your eye on the horizon: RRSPs are a long-term
5) Contribute regularly
It is easier for most people to come up with $100 a month than $1,200
once a year. Arrange to have a manageable sum automatically moved, free
of charge, directly from your account or pay cheque into your RRSP. When
you buy mutual fund units on a monthly basis (dollar-cost averaging),
you minimize the probability of purchasing at a market top.
6) Buy spousal RRSPs
You can put any amount of your eligible RRSP contribution room into a
spousal RRSP (the definition of spouse includes common-law spouses). You
get the deduction while your partner gets the money accumulating for retirement.
Your goal should be to make your spouse's retirement income equal to yours.
Remember though, that if you contribute to a spousal plan and your spouse
makes a withdrawal from it within three years (including the year of your
contribution), the withdrawal will be treated as your income, taxable
in your hands.
7) Consider borrowing
A loan can help you maximize your unused RRSP contribution room from past
years as well as this year's contribution. Although borrowing costs are
not tax deductible, you can use your tax refund to reduce your debt. Pay
off the loan within a year and you'll be ahead of the game.
8) Do your homework
Try to read financial journals and review your portfolio annually. If
you don't understand how your investment operates, can not comprehend
the financial statements or simply don't know how to set attainable goals,
find a qualified investment professional who can.
With a little creativity, you may be able to get your
hands on an RRSP contribution for this year, even if your cash cupboard
is bare. Here are a few suggestions:
9) Make a contribution
You are allowed to "contribute" any qualifying securities you
hold outside your RRSP directly into a self-directed RRSP -- including
GICs, mutual funds, stocks, bonds and treasury bills. If your RRSP contribution
limit is $7,500, for instance, and you have $7,500 worth of equities,
you can transfer your securities into your self-directed RRSP as your
annual contribution and get the full $7,500 tax deduction. The securities
however, are valued at their fair market value on the day that you contribute
them, so you will have to pay tax on any accrued capital gains. Do not
use this strategy if your securities have gone down in value as you will
not be able to claim any accrued capital losses at the time of transfer
to your RRSP. You are better off selling them first, claiming the loss
and then transferring the residual amount to your RRSP.
10) Swap investments inside
and outside your RRSP
Assets that you hold personally, outside your RRSP, can be switched --
at fair market value -- with other assets that you hold inside your RRSP.
This isn't technically a contribution, but it is an effective way to switch
interest-earning investments you hold outside your RRSP, where their returns
are fully taxable, into your RRSP where the interest will be tax sheltered.
You would then swap out of the RRSP an equal amount of investments earning
capital gains or dividends Once the swap is done you will hold the investments
with the more favourable tax treatment out side of your RRSP. Be careful:
swaps require the cooperation of the self directed RRSP trustee and often
a fee will be charged.
11) Keep your RRSP loan
Today's low-interest environment can make an RRSP loan really pay off.
Most financial institutions now offer one-year RRSP loans at preferential
rates. Some also allow you to delay the first payment for a month to 90
days, and give you a year or more for repayment. Reduce your loan interest
costs by applying your entire tax refund against your loan, and make sure
to repay the entire loan plus interest within a year.
12) Pay yourself first
If you find yourself scrambling for your RRSP contribution every year,
why not start preparing for next year's contribution right now? Most financial
institutions can arrange to transfer a specific monthly sum into mutual
fund units or another savings vehicle (usually referred to as a pre-authorized
chequing plan, or PAC). This is a particularly effective approach when
buying units in an equity-based mutual fund, because it eliminates the
need to predict which way the market will go.
13) Find out what is available
Many companies offer group retirement plans that take the guesswork out
of your investment choices. Some of these plans even match your contributions.
Your employer might also be able to arrange to deduct your contribution
at source -- which would provide you with your income tax refund right
on the spot by reducing the income tax deducted from your paycheque.
14) Invest your income
As soon as this windfall arrives in the mail, march it down to your financial
institution and top up this year's RRSP contribution or start a down payment
on next year's plan.
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, Fiscal Agents Money Management Newsletter
25 Lakeshore Road, Oakville, On L6K 1C6.