Well, it is that time of year again. We’ve just celebrated the start of a new year, so now it’s time to think about contributing to your RRSP. Did you know that there is more to RRSPs than just contributing? Here are our top seven things to consider to get the most out of your RRSP.
Maximize Your Contribution
The more you contribute, the more money you invest, the more opportunity to earn interest, dividends, and distributions. If you are in a higher tax bracket, investing the max can lower your tax rate, saving you money.
When You Shouldn’t Max Out Your Contribution
OK, so there is one caveat to maxing out your contribution. If you know you will have a significantly higher income soon, you may want to wait to claim the deduction until you are in the higher tax bracket to save more in taxes. For example, if you invest $10,000 while you are in a 15% tax rate, you save $1,500 vs. saving $2,600 in a 26% tax rate.
Don’t Wait Until the Deadline
The sooner your money is working for you, the better. Consider investing earlier in the year vs. later and try not to wait until the March 1st cut off the following year. If you can’t invest the maximum contribution at the beginning of the year, then set-up a monthly contribution program.
Turn Large Tax Refunds into Usable Funds
While a big tax refund cheque once a year can be exciting, think about it like this: the government is taking your money as an interest-free loan. You are missing out on the opportunity to invest and earn on that money throughout the year. If you are receiving a large cheque, consider filing a T1213 form to reduce the amount of income your employer withholds from your paycheque, giving you more funds to invest throughout the year.
Use Your RRSP Tax Refund Wisely
Rather than spending all your RRSP related tax refund on something bright and shiny, consider using it as a lump sum towards next year’s RRSP contribution or using it to pay down high-interest debt such as credit card debt.
Fixed income investments like GICs are safer and more attractive if you are concerned about losing money for your retirement. If your investment isn’t covering the inflation rate, it’s almost the same as losing money. Consider diversifying your investment into Exchange Traded Funds (ETFs), stocks, bonds, mutual funds, and alternative investments like private real estate. A diverse portfolio can help you mitigate risk and balance security vs. opportunity.
Get the Advice of Experts
Talk to a financial advisor or portfolio manager to help you make the right decisions for your retirement. They will have the experience and knowledge to answer your questions and make recommendations for your unique situation.