February 04, 2009

10 tips for RRSP Contributions

The annual rush to beat the deadline for RRSP contributors can be stressful. No less worrisome is the nagging feeling that you may have missed an opportunity by neglecting some step in the process.

Patricia Lovett-Reid, Senior Vice President, TD Waterhouse Canada Inc. outlines ten ways to make a more effective RRSP contribution In her recently published retirement planning guide.

  1. Don't make contributing to your RRSP a once-a-year-event. With a regular contribution plan, you'll avoid the February rush and your money will start working for you sooner.
  2. Don't let your tax refund go to waste. Rather than spending your tax refund, consider repaying your loansand credit cards, paying down your mortgage, or if you have the RRSP room, topping up your contribution.
  3. Don't forget about your long-term financial plan. By establishing a formal plan and monitoring your progress regularly, you'll have a far better chance of reaching your retirement goals.
  4. Maximize your RRSP contribution. Your maximum contribution for 2005 is $16,500.00, or 18% of your previous year's earned income, whichever is less. This may be reduced by a pension increased by your "carry forward" amount, which is the dollar amount you can carry forward to another year when you contribute less than the full amount in any given year.
  5. Diversify your portfolio. Studies have shown that more than 90% of your portfolio's return is the result of asset allocation and not individual investment selection. By ensuring your investments are allocated across all asset classes (cash, fixed income and equities), it will help to ensure that you always have the best performing asset class in your portfolio.
  6. Designate a beneficiary for your RRSP. Despite the fact that RRSPs make up the bulk of many people's assets, some still do not designate a beneficiary or take into account the tax consequences when they do name a beneficiary. Under the Income Tax Act, upon death, the assets in an RRSP that are designated to a spouse can be automatically transferred tax-free to their plan, avoiding probate fees and income taxes.
  7. Consider income-splitting strategies. Spousal RRSPs can provide a means of income-splitting for couples. They can help defer taxes right away for the contributor and reduce taxes at retirement. Shifting investment income from a higher income earner to the lower income earner can mean less tax payable if the lower income earner is in a lower tax bracket during retirement
  8. Don't "park" your RRSP contribution indefinitely. Every year, many Canadians "park" RRSP contributions in money market funds. These contributions could be missing out on growth potential and the opportunity for a better rate of return if invested elsewhere.
  9. Don't miss an RRSP contribution just because you're temporarily short of money. If you are short of cash at RRSP time, borrowing may be the answer. RRSP loans are usually offered at attractive rates and often give you the option of deferring the first payments for up to three months, potentially allowing you to repay all or part of the loan with your tax refund.
  10. Don't contribute in-kind of securities that have capital losses. If you contribute securities into an RRSP, the Canadian Revenue Agency deems this a disposition, or sale, of the securities. If the sale is done at a profit, taxes must be paid on the capital gain. If you contribute securities to an RRSP that carry a loss, you will lose the ability to net these losses against taxable capital gains at tax time.