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The Money Management Newsletter: RSP Planning
Tips and more to help you make the most of your RRSP!
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.

3) Maximize
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!

4) Diversify
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 investment.

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 in kind
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 repayments going
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 at work
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 tax refund
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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The Money Management Newsletter:
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RRSP Planning
w Retirement Income Planning