Five RRSP tips

Note: the information in this article is provided for educational purposes should not be considered personal tax advice or investment advice.

A Registered Retirement Savings Plan (RRSP) is a government approved plan that is primarily used to save money for retirement. Give your retirement savings a boost by considering the following tips.

Start investing early

It's never too late to start investing, but why not start early?

Consider the following two investors. Each contributed $2,500 per year with a compound rate of return of 5%.

  • The first started investing at age 20 and contributed for 15 years. At the age of 35 she kept her money invested but made no further annual contributions. At age 65 she has $267,000 saved.
  • The second started investing at age 35 and contributed for 30 years. At age 65 she has just over $166,000 saved.

Contribute early in the year to maximize growth.

For any given tax year, you can contribute to your RRSP from January 1 of the calendar year until 60 days into the following year. If you have the money, make your contribution for the year as early as possible instead of waiting until the RRSP deadline. Your plan will benefit from up to 14 extra months of tax-deferred compounded growth for every contribution.

Pay yourself first.

Before you pay your monthly bills and expenses, contribute to your retirement. Convenient, automatic withdrawals from your credit union account make saving easy and help build your savings faster. With a pre-authorized contribution or “PAC” plan you can contribute as little as $50 weekly, monthly or semi-annually – whichever is right for you. A PAC plan lets you take advantage of dollar cost averaging to maximize your growth opportunities and reduce risk. Dollar cost averaging smoothes out the volatility of your fund holdings because you buy more units when prices are lower and fewer when prices are higher.

Add foreign content.

Canada is a small player in world markets. In fact, 98% of the world’s investment opportunities are outside our borders. A geographically diversified portfolio can boost your potential returns and reduce the risk in your portfolio.

Contribute the maximum amount allowed.

This allows you to take full advantage of the tax deduction from contributions and ensures that you‘re putting enough aside for a comfortable retirement.

Your RRSP contribution limit is calculated each year. The following items are considered:

  • Previous year earned income
  • Pension adjustments
  • Past service pension adjustments
  • Pension adjustment reversals

Unused RRSP contribution room can be carried forward indefinitely. Check your Notice of Assessment from Canada Revenue Agency (CRA) for your total allowable contributions carried forward.

CRA carefully defines the term “earned income” for RRSP purposes. Among the items to be included are salary or wages, rental income, alimony received, net business income and disability benefits paid by the Canada Pension Plan. Earned income does not include investment income, retiring allowances or severance pay, taxable capital gains, or pension income. See your investment professional, accountant or a CRA representative for more information on earned income calculations.

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