Thursday, February 8, 2018
5 Ways to Maximize Your RRSP
This week at Budget Boss, we have been learning about the Registered Retirement Savings Plan and how it can be a great way to save for your future. With the RRSP deadline fast approaching you might be stressing out about how or how much you will be able to contribute this year. Don’t fret, you are not alone. One thing you can be happy about is that even small contributions can help a great deal when it comes retiring comfortably. While I have explained how valuable an RRSP is over the course of this week, you might not know how to fully take advantage of this great retirement vehicle. In today’s post, I will show you 5 methods to maximizing your RRSP. If you haven’t opened your plan yet, you can implement a system from the get-go. If you already have an RRSP, this tax-season might be a good time to make some adjustments for next year’s contribution.
1) Pay yourself first, actually pay your RRSP first
RRSP deadlines for some people are ho-hum. These are the people who make their contributions all year long and reap the benefits come tax time. In order to stay on top of contributions you can and should deposit into your RRSP right out of your pay. This is the “Pay Yourself First” method and it is the tried and true way of never missing a beat when it comes to planning for the future. I always recommend to my clients that they align their investment contributions exactly with their paydays. This allows them to put money into their investments before they have had a chance to spend it. Many people save into their RRSP whatever is left over at the end of the year. Sometimes this amount might be nothing, depending on how expensive their year was. For those who make regular contributions, this is never an issue. The main worry is what do I do with my tax return, not how can I afford to make a deposit. You also take advantage of the Dollar-Cost Averaging method of saving by contributing throughout the year. Your money will grow exponentially because you are benefiting from up and down markets.
2) Utilize your TFSA
If you follow me, you know how I feel about the Tax-Free Savings Account. Everyone should have one. EVERYONE. If you do have one and contribute to it regularly, you might want to consider a withdrawal from your TFSA to make a deposit into your RRSP. Now, this all depends on what you use your TFSA for, but many use it as an emergency fund or for liquidity. There are several reasons why using your TFSA to fund your RRSP is useful. First off, you will be able to take advantage right away of the nifty tax-deduction you will get when you file your taxes. This could be thousands in tax savings of which you can use to put right back into your TFSA or spend how you wish. You also regain contribution room for your TFSA every January for withdrawals you made from your TFSA the previous year, so you can catch up on last years withdrawals. Using your TFSA in conjunction with your RRSP is also a good habit for the future as the two can be utilized together as a plan to reduce future taxes and efficiently withdraw funds. The TFSA provides the flexibility and efficiency to pump up your RRSP when you haven’t been making regular contributions to your retirement account. It is worth considering this tax season.
3) Take advantage of unused contribution room
Contribution room for your RRSP carries over into the next year and moves forward until used. It is not uncommon for people to have thousands even hundreds of thousands of dollars worth of RRSP contribution room in their accounts by the time they are ready to retire. If you have the room and a large tax bill coming, you may want to consider going back in time and making a large deposit into your RRSP. This large deposit will reduce your taxable burden for the year and provide you with a large return come April. You can check your contribution room at the Service Canada website or your last year’s Notice of Assessment. This becomes especially useful when you have a large taxable gain on the year such as an inheritance or windfall. Ideally, everyone would retire with no contribution room left on their RRSP, but often life gets in the way. Understand and take advantage of your carried forward contribution room if you can.
4) Start early as possible
With the advent of the TFSA in 2009, many young people have neglected the TFSA’s grandfather, the RRSP. I believe using both your advantage is a great way to save for the future. Starting young with your RRSP is very beneficial. Those who start at an early age get the incredible immediate tax-deductions at a time where that money can be sorely needed. While many love the no tax paid on withdrawal that the TFSA offers, I know I do, the taxable gain upon withdrawal in the RRSP might be the right deterrent to stop you from taking money out of your investment account. I like to think of this as “Bye-Bye Money,” meaning you say bye-bye to it until much later in life. If you do that, you will take advantage of the incredible effects of compound interest. Don’t believe me, check this out:
$25,000 invested for 30 years with 7% compounded rate of return = $202,912.44
$25,000 invested for 40 years with 7% compounded rate of return = $407,785.29
That amount is doubled with just ten extra years of investment. That is 25K with no extra contributions, just sitting around for ten more years. Do you see the benefit of starting when you are 25 as opposed to 35, or 45, or 55? Albert Einstein called compound interest the “8th wonder of the world.” I heard he was a smart guy.
5) Understand the tax implications upon withdrawal
When you take money out of your RRSP you are taxed for that amount as income at your current marginal tax rate. So, if you take out $5,000 from your RRSP one year and you made $50,000 that year in income, you now made $55,000 in income that year. One way many people use this to their advantage is by delaying their withdrawals until they absolutely must. You must start taking money out of your RRSP no later than the age of 71, where you must roll over your account into a Registered Retirement Income Fund (RRIF), or an Annuity. Once this occurs you will have a mandatory minimum withdrawal every year that you must make. For those who make an income in retirement or are on pension plans, this amount may not be necessary for their day to day living. A solid option is to take this withdrawal and put it into their TFSA. This option is appealing because they now have access to the money tax-free when they do choose to utilize it. It can also grow tax-free, just like the RRSP did. In my ideal world, everyone would have both the RRSP and the TFSA, so they can efficiently manage their contributions and withdrawals. It would be worth speaking with your financial advisor about this system.
For decades Canadians have been using the RRSP for their retirement income and that shouldn’t change anytime soon. It still provides the best bang for your buck. Maximizing its efficiency is a great way to get even more out of your RRSP. Take the time to know all your options moving forward.
Thanks for tuning in today as RRSP Week continues at Budget Boss. Don’t forget to tune in tomorrow when we discuss RRSP’s versus TFSA’s to wrap up the week. If you would like to discuss your RRSP or you would like to open an account, please do not hesitate to contact me at email@example.com. have a great day Bosses!
“Happy is the person who knows what to remember of the past, what to enjoy in the present, and what to plan for in the future.” – Arnold H. Glasow
Email – firstname.lastname@example.org