If you have been living under a rock for the past 2 months, you probably don’t know that you only have 9 days left to contribute to your RRSP for the 2011 fiscal year. I know from experience that several investors make their contribution at the very last minute. This is why I asked a bunch of fellow bloggers to provide me with their #1 RRSP advice. But first, I wanted to add a few quick RRSP facts.
So if you have one article to read this morning, pick this one: it will give you all the info you need on RRSPs! (but you had better print it, it’s a darn long article!)
Quick RRSP Facts:
RRSP contribution deadline is February 29th. Don’t invest on March 1st, your RRSP contribution will not be eligible for 2011.
RRSP maximum contribution is 18% of your previous year salary minus your Pension Adjustment (PA). This means that if you need to take 18% of your 2010 income to make your 2011 RRSP contribution.
Pension Adjustment (PA) reduces your RRSP contribution limit and is calculated by your employer. The PA is related to your employer’s registered pension plan or differed profit sharing plans.
RRSP maximum contribution in dollars is $22,450 for 2011 and $22,970 for 2012 (you can make your 2012 RRSP contribution in January or February of this year if you have already maxed out your 2011 contribution).
If you are looking to use the HBP (First Home Buyer’s Plan) to withdraw from your RRSP without tax implications, the money needs to be invested in your RRSP 90 days minimum prior to the withdrawal to qualify under the HBP.
Now let’s go with my fellow blogger’s RRSP advice:
“The Ninja says only contribute to your RRSP once you have maxed out the TFSA. For most Canadians the TFSA is a much better option over the RRSP, especially if your income is under 50K. With the TFSA you can shelter your investment income from taxes, like the RRSP. But you won’t pay any additional tax when you draw down the TFSA in retirement. TFSA withdrawals will not affect your government benefits, and you don’t have to worry about converting it into a RRIF or annuity at age 71. This makes the TFSA the ideal investment plan for retirement!
It’s difficult for most Canadians to get past the lack of a refund with a TFSA, so they continue to contribute to their RRSPs. But most people don’t seem to understand that with the RRSP, they will be taxed on the withdrawals at some point down the road. At retirement this could be a hefty tax bite. I don’t know about you, but I don’t want to pay more taxes in retirement than I have to and deal with the RRSP headaches at age 71. I try to maximize my TFSA contributions first.
If you do contribute to your RRSP then make regular monthly contributions, instead of a loan you are paying interest on throughout the year. Then top-up the RRSP in February with a smaller loan. This way, you only have to pay interest for two or three months on a smaller amount, until your refund arrives. You then use the refund to immediately pay off the short-term loan.
You can also compound the bang for your buck in this case, by borrowing more than your refund amount. This will significantly increase the amount of your refund, especially if you are in a higher tax bracket. But make sure this is only a short-term strategy, where the refund will pay off the loan! “
My thoughts: if you are planning to buy US stocks with your investment, you are better off doing it with your RRSP account since there is a 15% withholding tax in your TFSA. If you don’t count on other sources of income at retirement (like a pension plan for example), your RRSP withdrawals will be taxed at a smaller marginal tax rate. Thus, both RRSP and TFSA calculations I’ve seen so far show that they are generating about the same amount of dollars (net of taxes) if someone invests his tax return as well.
“My #1 RRSP advice is about RRSP Loans.
It may seem like a good idea to turbo-charge your RRSP and get a juicy tax refund, but with a loan repayment eating up a large slice of your budget how will you afford to make regular RRSP contributions going forward?
If you want to catch up on RRSP unused contribution room, trim back your expenses or find a way to make some extra money to sock away what you want. Don’t over borrow! You can read more about RRSP loan strategy at Boomer & Echo here.”
My thoughts: I’ve been running some calculations and unless you are planning to make a sick investment return (like 8-10%), borrowing over more than 2 years is not a good strategy to max out your RRSP contribution. You are better off not taking the loan and setting up a systematic investment that would equal the payment. You will get better results in the end.
“If you’re going to contribute, keep your fees in this account as low as possible. Why? Over a 25-year period, if you invest in actively managed mutual funds, that have management expense ratios (MERs) of 2% or more, you’re going to lose about 50% of your portfolio value over that period. I know that sounds hard to believe, but it’s true. A sad truth for many investors. There are many online calculators out there to prove this. My RRSP advice is to keep your portfolio costs as low as possible, for as long as possible. You can do this by investing in indexed products like indexed mutual funds or even better, broad-market Exchange Traded Funds (ETFs). Many ETFs provide investors with great transparency, great liquidity and market returns for very little effort, all at a rock-bottom cost. Instead of letting some mutual fund managers take 50% of your money over the next couple of decades, I suggest you keep that hard-earned money for yourself. Invest in products that maximize your return, minimize your risk with minimal cost. You’ll be a wealthier investor for it!”
My thoughts: after inflation, fees are definitely the biggest investment return. If you invest with mutual funds, make sure you don’t pay over 2% on your overall portfolio (should be able to create a nice portfolio at 1% – 1.5% depending on how much you invest). If you are a more advanced investor, consider ETFs and dividend investing.
“For me, I’d say the number #1 RRSP advice is to dollar cost average through regular contributions (instead of lump sum payments with whatever people have left over at the end of the year) and remember to play it safe (after all, it is your retirement money you’re investing in). By playing it safe, I mean keep fees low and use index investing (for me, I have a high number of bonds and other fixed income investments because it is my retirement money after all). I guess I’m giving about 4 tips within this one tip, but I think that they aren’t mutually exclusive and are all important as RRSP advice!”
My thoughts: amen to that… but I still prefer dividend investing over indexes .
“Many Canadians invest in RRSPs so that they can save on taxes and pay less income tax on their income, let the money compound tax-free, and withdraw the money later in life during retirement, hopefully at a lower tax bracket. This is a good reason to invest in RRSPs, but it must also be balanced against investing in TFSAs. These special accounts don’t save you taxes in the present, but they will also compound tax-free and you will not have to pay taxes when withdrawing from them in the future. Even better, you can withdraw from them long before retirement age.
However, there is still a very compelling reason to invest in RRSPs, and that is the RRSP match. Some employers offer a match of up to 5% or more of the employee’s salary, so there is effectively a 100% return on your investment right off the bat. I wouldn’t recommend for someone to put everything in their RRSPs, since that money gets locked in, but I would definitely recommend everyone take advantage of the match. This is free money and can make a big difference in helping you build up net worth and a nest egg for the future.”
My thoughts: if your employer matches fully or a part of your contribution to a retirement plan; I URGE you to maximize your contribution up to the maximum matching contribution by the employer. This is “free” money and will make a huge difference in your retirement plan!
“Among the benefits of the RRSP is that the amount you contribute is not considered taxable income. So you get the tax you paid on the amount you put in your RRSP, and you get more back if the amount you contributed drops you to a lower tax bracket. The thing is as a student, I am in the lowest tax bracket. Every April I get all of the taxes I paid from every pay cheque back. So students seem to benefit less than those in the work force. But you can defer the amount to the next year and so on. Students are able to contribute money to their RRSP, even just to start one, and then defer the tax credit until they are working and have taxable income. My RRSP has a mutual fund which pays dividends and are DRIPped, and I do not plan to add more to this RRSP until I have taxable income. But the great thing is that the money in it is going to get me a refund cheque from the government when I decide. And at that point the RRSP will have grown in value and shares from the reinvested dividends. My best advice to students is to open an RRSP now, and then defer the tax credits to when they will help you the most.”
My thoughts: You should definitely not use your tax deduction from an RRSP contribution when you are a student. With the TFSA’s, I would suggest to maximize this investment account instead of investing in a RRSP. The TFSA is more flexible and you don’t even benefit from the tax deduction as a student if you go with the RRSP!
Please don’t feel like you need a bunch of money to get started investing with your RRSP. Just get started with a small, automatic contribution each month. One of the biggest (yet not talked about)
risks associated with retirement investing is the risk of starting too late. There are several reasons people find to not invest in their retirement. Don’t let your excuse be lack of funds. Start today! No
amount is too little. Even if you have to start with a small amount, like $25 a month, it’s better than nothing. This amount will help you get started, the most important thing. This will also help you get
used to the act of saving for your retirement. You’ll become familiar with the process and pretty soon it will be second nature. Make sure you automate the contribution as well. By doing this, you won’t have to remember to make the money transfer each month. Before you know it, you’ll be investing more each month, and not even missing the money. Read more about retirement excuses at PT Money.
My thoughts: The sooner you start saving, the better your life will be! At first, it’s just a matter of creating the habit and becoming familiar with investing. Later on, you will look at your portfolio and will be surprised to see how big it grew without having you noticing anything!
So that’s it for the last minute RRSP advice. I have one of my own but you’ll have to wait until Wednesday to read it ;-D. Readers; do you have any other RRSP tips?
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