Since their introduction in 1957 as an incentive to save for retirement, Register Retirement Savings Plans (RRSP) have evolved into the most popular savings vehicles in Canada. All too often though, RRSP decisions are made in a panic to meet a deadline, with little or no planning or understanding of the effects of our actions. Here are a few top strategies to help you get the most from your RSP and retirement plans.
Make Systematic RRSP deposits
Most of us plan and budget on a monthly basis. You can do the same with monthly pre-authorized deposits to an RRSP. It is also possible to get an instant tax break by contributing this way. With approval from CCRA ( Canada Customs and Revenue Agency), your RRSP deposits can be subtracted from income before deductions are calculated. This reduces the amount that needs to be sent to Ottawa each pay period but also reduces any tax refund that may be coming to you.
Use RRSPs to save for or make a down payment on a home
Income tax legislation allows qualified home buyers to withdraw up to $25000.00 per person of existing RRSP funds for the purchase of a new home. Income tax will not be withheld on this withdrawal. Payments are required to be repaid to an RRSP over the next 15-year period. If a repayment is missed in any year, it will be considered a taxable RRSP withdrawal.
Borrow to make your RRSP deposit
You may want to consider borrowing to maximize your RRSP deposit if you don’t have the cash or have waited until the deadline. Although RRSP- loan interest is no longer tax-deductible, the immediate tax savings and long-term tax-deferred growth usually more than makes up for any loan interest cost. Due to the interest not being deductible we recommend that in most cases the loan be no more than you pay off in one year.
Reinvest your tax refund
A few weeks after filing your tax return, a refund check arrives in the mail. It’s only natural to want to spend it. A 30-year old depositing $5000.00 per year to their RRSP at 8% compounded annually will have about $861,584.00 at age 65. Assuming 40% tax savings, the RRSP will grow by an additional $330,680.00 by depositing the tax savings as well. So don’t blow your tax refund. CCRA makes it easy for us to maximize contributions. After we have filed our tax returns, they tell us what our RRSP deposit limit is for the next year. This amount appears on your most recent tax notice of chessmen. While the mechanics of RRSPs are relatively simple, the ongoing retirement financial planning associated with them can be more complex. It is highly recommended that you work with some one experienced in the are of RRSPs and retirement planning to help set up and monitor your program. Your financial comfort in retirement may just depend on it. – M Dumond
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