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February 10, 2015

Make the Most of Your Registered Retirement Savings Plan

The 2014 Registered Retirement Savings Plan (RRSP) contribution deadline is Monday, March 2, 2015. Here are some facts about RRSPs to help you make the most of this great opportunity to grow your retirement savings, better plan your personal taxes, and enjoy a comfortable retirement.

Make your maximum contribution

Your RRSP contributions provide a deduction from your taxable income, which for most, results in a tax refund when you file your personal tax return.

For 2014, you can contribute a maximum of 18% of your earned income in 2013, to a maximum of $24,270. Refer to your 2013 notice of assessment as you may have additional unused carry forward limit.  

This number will be adjusted if you are a member of pension plans and/or profit sharing plans, depending on the value of your benefits in the previous year.

Making the maximum contribution at the beginning of each year will add additional compounding power to your RRSP.

Consider a Spousal RRSP

Whether legally married or living common law, you can contribute all or part of your RRSP room to a Spousal RRSP and deduct the contribution from your taxable income. Even with the new income splitting rules, a Spousal RRSP can provide greater flexibility for retirement and tax planning.

Regular contributions

One strategy is to use a pre-authorized cheque (PAC), where an automatic withdrawal comes out of your bank account at set periods – for example every two weeks or monthly. This disciplined approach to saving is often called “paying yourself first”

For those who count on annual bonuses to make lump-sum contributions, it is still worthwhile to set up a smaller PAC throughout the year, and then use as much of the bonus as needed to maximize your RRSP contribution.

Regularly investing your contributions (versus making a lump sum contribution, or parking your money into savings or term deposits) is wisely referred to as ‘dollar cost averaging’ into the market. This proven strategy has been shown to reduce market risk by removing the temptation to make emotional decisions based on short term economic or market conditions.

Consider an RRSP loan

If you have a lot of unused RRSP contribution room from previous years, consider taking out a RRSP loan to catch up. Most RRSP loans are offered at extremely attractive rates and can be arranged on very short notice. If your balance is larger than you can repay in one year, consider a home equity line of credit.

Make a Contribution in Kind

If you hold securities outside your RRSP, consider transferring them to your RRSP. The market value of your investment on the day you transfer it into your RRSP will be the contribution value for tax purposes. Watch out if this triggers a capital loss though. While capital gains triggered on the transfer to your RRSP are taxable, any capital losses triggered are not deductible.

Carry Forward

If you can’t make your maximum contribution one year, you can carry the unused amount forward to a future year, and contribute it later. You may also choose to delay claiming your current year’s RRSP tax deduction to a future year when you expect to be in higher tax bracket. These can be useful strategies for those who do not have the funds or need the tax deduction now

Children

Remember to always file tax returns for children to start accumulating RRSP room, receiving HST/GST refunds (if 19 years old), reporting income that you’ve split, claiming tuition and education credits, claiming student loan interest and moving expenses.

“Safe” investments

Conventional wisdom says the older you are the more of your RRSP should be in cash, bonds, GICs, and other “safe” investments. Depending on your individual circumstances, this may not be the best strategy. With all time low interest rates, longer life expectancies, and retirements that can last 25 or 30 years, you need at least a portion of your RRSP invested in equities, in order to keep you ahead of inflation.

Make the most of foreign content

Markets move through their cycles at different times. Although Canadian equities have performed well since the financial crisis, this past year other markets have performed better. Given that 80% of the Canadian stock market is in financial services, resources and materials, foreign markets provide exposure to additional opportunities in both equities and fixed income, and can protect your portfolio.

As always, broad diversification and the right asset allocation, appropriate for your specific objectives and risk tolerance are key.

Home Buyer’s Plan (HBP)

The HBP allows you to borrow funds from your RRSP to purchase your first home. You and your spouse can each borrow up to $25,000 from your own RRSP, providing the funds have been on deposit at least 90 days before you withdraw them. At least 1/15th of the funds must be repaid each year, beginning two years after the funds are withdrawn.

Lifelong Learning Program (LLP)

The LLP allows you to pay for training or education with RRSP funds. You can withdraw up to $10,000 per calendar year to finance full time training or post secondary education. The student can be you or your spouse, but not your children. The total amount that can be withdrawn is $20,000, with withdrawals made over a maximum of four consecutive years. At least 10% of the amount borrowed must then be repaid each year, over maximum period of 10 years.

Both HBP and LLP loans should be considered carefully as monies withdrawn from your RRSP are no longer growing and compounding tax free so you can accomplish your retirement goals. This can have a major negative impact on your future plans.

Remember your 71st birthday

You have until December 31st of the year you reach the age of 71 to transfer your RRSP to a Registered Retirement Income Fund (RRIF), or buy an annuity. However, depending on your financial situation, waiting until age 71 may not be your best strategy. Depending on your other income and marginal tax rate, starting your RRIF income earlier may reduce your future taxes and increase your government entitlements.

If your spouse is in a lower tax bracket, and you are 65 or older, new income splitting rules allow you to allocate up to 50% of your RRIF income to your spouse on your tax return. This may reduce the overall tax you both pay, and entitle you to tax credits and benefits you might not otherwise be eligible for.

Seek professional help

Saving for your retirement doesn’t have to be complicated. But it does take some planning. To make sure you get the most out of your retirement, let’s discuss your personal financial situation and goals. Together, we can create a personal and customized retirement strategy for you.

©iStockphoto.com/Rosemarie Gearhart
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