Make the most of your Registered Retirement Savings Plan (RRSP): it’s simpler than you might think!
Here are some tips to consider at any time of the year, but especially before the annual RRSP contribution deadline. The deadline to contribute to an RRSP for the 2019 tax year is March 2, 2020.
The tax year and annual deadline are important because RRSP contributions may reduce your taxable income, giving you an incentive now to put money away for the future.
1. Start early and invest regularly
The earlier you start, the more you may have in the future.
It’s easy to set up automatic contributions to your long-term savings or investment accounts. Once set up, you can take comfort knowing you’re actively saving for the future.
Imagine three investors, aged 25, 35 and 45, contributing $100 every two weeks until the reach 65. They all earn an annual average return of 5%. The 25 year old ends up over $150,000 wealthier than the 35 year old and almost $250,000 wealthier than the 45 year old.*
No matter when you start, let us show you how a regular investment plan can help you reach your retirement goal.
2. Harness the power of compounding
By making RRSP contributions on a regular basis (for example, every pay day), you could grow your nest egg faster, taking advantage of market returns throughout the year.
Look at the difference between investing regularly through the year instead of contributing the equivalent lump sums at the RRSP deadline; over 40 years it could add up to $18,052!*
3. It pays to have a plan – keep it fresh
Many people underestimate how much they will need to save to meet their income requirement going into retirement. Having a plan in place and regularly reviewing it against your goals can help avoid unpleasant surprises and last minute scrambles.
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4. Consider your options
An RRSP is the typical go-to option for many Canadians saving for retirement. Depending on your circumstances, a Tax-Free Savings Account (TFSA) may be an additional option for you to consider.
A TFSA is flexible in the event you need access to emergency funds, and may be more advantageous depending on your tax bracket during your active savings years and going into retirement. For those who have never contributed to a TFSA, the accumulated contribution room may be up to $69,500 in 2020 – and that is expected to continue to grow each year.
5. Consolidate your registered accounts with one financial institution
Generally, Canadian tax rules allow you to transfer certain registered accounts between financial institutions without triggering a taxable event or affecting your contribution limits.
This includes TFSAs, RRSPs, registered pension plan amounts if you are changing employers (may be subject to transfer limits), and some or all of a lump sum "retiring allowance" received as part of a severance or retirement package.
Having all your retirement savings in one place makes it easier to keep track of progress against your goal, can potentially reduce fees and help ensure proper diversification by avoiding overlap in your portfolio.
6. Borrow to maximize your contributions
7. Take advantage of a Spousal RRSP
8. Consider an asset mix strategy
9. Think global
10. Defer deductions until a later tax year
Many investors automatically claim a deduction for the amount they have contributed without considering if it might be better to claim it in a future year.
Deferring deductions might make sense for those expecting to be taxed at a higher marginal tax rate in the future due to career progression or potential changes to tax brackets. But there is a cost to this approach because the deduction won’t apply right away.