Registered Retirement Savings Plans (RRSPs) are an important part of your overall financial strategy. They allow you to invest funds that will grow on a tax-free basis until they are withdrawn. To get the most out of your RRSPs, you need to understand their features and benefits.
List of DO’S and DON’Ts to get the Maximum Benefit from Your RRSPs
- DO make the Maximum Contributions Each Year
For 2012, the maximum amount you can contribute to your RRSP is 18 percent of your earned income or $22,970.00, whichever is less minus your pension adjustment plus your past unused contribution room. By contributing the maximum amount each year, you will have a higher amount of savings in your plan, more money in retirement and potentially a good size tax rebate.
- DO take advantage of past carry-forward room
If you have not made your maximum contribution to your RRSP in past years, you have the ability to make up for it. Revenue Canada tracks your unused room on your annual notice of assessment and includes the amount in your allowable RRSP contribution room for the given year. Unused RRSP deductions are reported on your annual Notice of Assessment from Canada Revenue Agency. Taking advantage of any unused room may reduce your taxable income enough to provide for a healthy tax rebate. You can also make an RRSP contribution today but claim the deduction in the future when you are in a higher tax bracket. A financial professional can advise on this.
- If you have some extra cash, DO consider over-contributing within the allowable rules
You can over-contribute $2,000.00 to your RRSP during your lifetime without having to pay a penalty. You are not entitled to deduct the over-contribution on your income tax return, but the extra money will still grow on a tax-free basis in your plan. The Canada Revenue Agency charges a penalty of 1% per month on the amount of the over-contribution that exceeds $2,000.00.
- DO consider borrowing money for your RRSP contributions.
Taking out an RRSP loan can make sense in certain circumstances. If you use the tax refund to pay down the loan or will be able to pay off the balance over 12 months or less, this is an excellent strategy to help you maximize your contribution to your RRSP.
- DO make your annual contribution at the beginning of each year.
By making your annual contribution early, you are taking advantage of the benefit of compound interest. Waiting until December to contribute means losing out on almost 12 months when your contribution could be growing for you.
- DO make your RRSP the investment of last resort if you are in need of cash.
Withdrawing funds from your RRSP has tax consequences and means you will have less money in retirement. Before you take money out of your plan, consider other options.
- DO name a ‘qualified’ beneficiary for your RRSP.
Unless you designate a ‘qualified’ beneficiary for your RRSP, the full market value will be included as income on your final tax return and taxed at your marginal (highest) tax rate. A qualified beneficiary would be your spouse, common-law spouse, or a financially-dependent child or grandchild.
- DON’T forget other investments vehicles for retirement.
An RRSP is not the only option you have when it comes to saving for retirement. You can also put funds into a Tax-free Savings Account (TFSA) or hold them in a non-registered account. A financial advisor can review your financial situation and suggest the best investment vehicles for your needs.
Do you have questions about how to make the most of your RRSP? As an experienced financial advisor, I can review your overall financial picture and suggest a plan that will help you reach your retirement goals. Please contact me to arrange a personal consultation.
This article is intended as a general source of information and should not be considered as personal investment, tax or pension advice. We are not tax advisors and we recommend that individuals consult with their professional tax advisor before taking any action based upon the information found in this publication.