Maximize your RRSP today and reap the rewards!
There are a number of strategies to consider that can help accelerate your plan using assets you have readily available and key tax planning benefits.
- Remember, taking full advantage of your unused RRSP contribution room could help to build your portfolio.
- Understand how much contribution room you have. Move money into your RRSP sooner rather than later.
- Work your RRSP contribution into your monthly budget.
Year after year, many Canadians leave a key financial opportunity on the table by not contributing the maximum allowable amount into their registered retirement savings plan (RRSP). For example, contributing $10,000 into an RRSP that generates a 6% return, compounded annually could turn into $57,435 over the span of just 30 years. Plus, contributing the full amount creates a larger income tax deduction that could result in a significant tax refund.*
Know your limits
It’s important to know how much contribution room you have, prior to sitting down to discuss your RRSP strategy. Each year, the CRA identifies your unused contribution room for the upcoming tax year on your Notice of Assessment.
It may be to your benefit to move money you currently have in savings accounts or other investments into your RRSP sooner, rather than later. Moving these dollars into your RRSP will not only result in a reduction of your annual tax bill – but it also allows you to maximize growth inside your RRSP, without generating immediate taxable income. It’s important to remember that interest earned on savings accounts and both realized and unrealized capital gains on non-registered investments, will be taxed prior to when they are moved into your RRSP. You can also withdraw from a tax-free savings account (TFSA) to make your RRSP contribution.
Any withdrawals from your TFSA are added to the available TFSA contribution room for the following year.
Consider working your RRSP contribution into your budget. Our monthly investment plan automatically deducts a specified amount from your savings or chequing account on a regular basis, and invests it into funds held inside your RRSP. Monthly investment plans can be customized to work best for you. We will work with you to help determine the appropriate dollar amount and frequency.
Consider the benefits of borrowing
In many cases, borrowing to take full advantage of RRSP contribution room makes sense. Maximizing your RRSP contribution now offers immediate tax savings this year, and tax-deferred potential growth for many years to come. Using this strategy can make it beneficial to borrow for a short period to maximize your plan.** As your Consultant, I can help you determine whether a loan fits into your plan by looking at the following factors:
- Your age: The impact of compound growth increases depending on the time that money is invested. While borrowing to invest may have more impact at a younger age, I can prepare an illustration that shows it’s never too late to save for your retirement.
- Your ability to repay: We would never recommend that you borrow more than you could possibly repay, because it could make it difficult to save for next year’s RRSP contribution. Together, we will create the right plan to make sure you can pay off the balance of your loan quickly and then start a regular investment plan to automatically take care of future RRSP contributions. In addition, contributing to an RRSP generates an income tax deduction that may result in a significant tax refund that could be used to help pay down a portion of the loan almost immediately.
- Your ability to borrow: An RRSP loan or line of credit available through Solutions Banking™, like any other use of credit, will increase your debt service ratio (the percentage of your monthly income that goes to pay off debts) and lenders rely on this ratio to determine your loan eligibility. When preparing your plan, we’ll be sure to take your complete financial picture and other monthly commitments into account.
If you have any questions about maximizing your RRSP, I would be glad to help.
*Pre-tax RRSP contribution assumptions –$10,000 investment purchased on
January 1, 2018 at a gross rate of return of six per cent over a 30-year period.
**RRSP loan assumptions – Client takes out a 1 year RRSP loan of $10,000 at a fixed rate of four percent on January 1, 2018 and makes a $851.33 ($818.00 principal and $33.33 in interest) payment on January 31, 2018. Client has a marginal tax rate of 40 per cent and receives a tax refund of $4,000, which is used to pay down the loan on February 1, 2018 (remaining balance on February 1,
2018 is $10,000-[$818.00+$4,000] , which is paid monthly ($471.09) over the remaining 11 months).
Investors Group Financial Services Inc.