So you’ve found out what RRSPs are, you think they might be a good fit to help you reach your financial goals, and you feel like you’re ready to get started. Now what?
The next step is getting some idea of how to use RRSPs, and going over some of the considerations you should think about before deciding if RRSPs are for you.
We’ve collected ten tips to keep in mind when thinking about RRSPs, that you should consider when deciding if they might be the right tool for you.
1. Contribute annually
Skipping just one annual contribution of $5,000 could reduce the value of your RRSP by almost $17,000 at the end of 25 years (assuming a 5% annual rate of return). It’s important to contribute every year to take advantage of tax-sheltered compounding growth.
2. Pay yourself first
Before you pay your monthly bills and expenses, contribute to your retirement. Convenient, automatic withdrawals from your credit union account make saving easy and help build your savings faster. With a pre-authorized contribution or “PAC” plan you can contribute as little as $50 weekly, monthly or semi-annually – whichever is right for you. A PAC plan lets you take advantage of dollar cost averaging to maximize your growth opportunities and reduce risk. Dollar cost averaging smoothes out the volatility of your fund holdings because you buy more units when prices are lower and fewer when prices are higher.
3. Take time to consider your decision
If you are rushing to meet the deadline, it’s easy to make a bad investment choice or none at all. If you are not sure, make your RRSP contribution in cash. Then, later, when you have carefully evaluated your options, transfer your “parked” money into an appropriate investment.
4. Think beyond cash
If you do not have enough cash on hand to contribute then consider moving investments from your non-registered plans to your RRSP. This “in-kind” contribution can be made with various investments deemed eligible. Remember you will have to report any capital gains earned on your investments up to the date of the transfer.
5. Understand your contribution amount
You’re allowed a $2,000 lifetime over-contribution. If you exceed this, you may be subject to penalties of 1% per month. So before making a contribution check the Notice of Assessment the Canada Revenue Agency (CRA) sent you for your allowable contribution room.
6. Avoid dipping in prematurely
Cashing in a portion of your RRSP has significant tax consequences unless you’re doing so through the Home Buyers’ Plan or Lifelong Learning Plan. First we’re required to immediately withhold between 10% and 30% of the amount withdrawn and forward it to the CRA on your behalf. Plus, your total withdrawal must be reported as income and taxed accordingly. In the end, the cash you’re left to spend may only be half of the amount initially taken out. So, cash in your RRSPs only as a last resort.
7. Remember to update beneficiaries
RRSPs have assigned beneficiaries, so if you’ve had any major changes in your life remember to update your designated beneficiary.
Spreading your RRSP accounts across multiple investment firms may result in additional account fees and over-complicate the tracking of your investments. To make proper recommendations, anyone advising you should have a full understanding of all your holdings and their combined diversification and risk.
9. Consider income splitting with 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.
10. Get advice
Talking to a financial advisor is the best way to get started, and meeting with them on a regular basis can help you stay on top of your progress, your investments and your options. Educating yourself and getting a good understanding of the financial tools and options available to you is important, but getting expert advice tailored for your unique situation is the key to ensuring you reach your financial goals.
*Mutual funds and other securities are offered through Credential Securities Inc. Commissions, trailing commissions, management fees and expenses all my be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise stated, mutual funds, other securities and cash balances are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer that insures deposits in credit unions. Mutual funds and other securities are not guaranteed, their values change frequently and past performance may not be repeated. Credential Securities Inc. is a Member of the Canadian Investor Protection Fund.