Back when certified financial planner Tannya McBride (Bachelor of Applied Business Administration - Finance ’07) was a financial adviser with CIBC, the days leading up to the annual Registered Retirement Savings Program deadline tended to be hectic.
Some days, quitting time pushed 8 or 9 p.m. as panicky clients hurried to make the most of their RRSP benefits. If she misses that time in her career, the JR Shaw School of Business finance instructor doesn’t let on.
While boosting your RRSP can certainly improve your income tax return, McBride doesn’t necessarily advise making a mad dash to the bank.
Planning for your retirement requires strategy (and, she stresses, often the help of a certified financial planner), which in turn requires identifying long-term goals, asking a lot of questions and, above all, staying calm, regardless of deadlines.
Here are a few things to know so you can make the best decisions for you and your money as we approach the 2017 RRSP deadline: March 1.
First, the basics: What is an RRSP? “An RRSP is an account and it is registered with the government so that it is tax deferred,” McBride explains. “It’s pretty much anything you want it to be.”
That means, first, you don’t pay taxes on income the account earns until you cash it out at retirement.
Second, it can be composed of almost any type of investment: guaranteed investment certificates, mutual funds, savings accounts and so on. Buy them at credit unions, banks, and investment dealers, as well as trust, insurance and mutual fund companies.
The benefits of RRSPs
“The main benefit is the compounding power of your money,” says McBride. Since income earned in an RRSP account isn’t immediately taxed, “All that money you’re saving in taxes is being reinvested in your RRSP.” That incentive creates discipline around saving, McBride adds. “Without RRSP programs, people probably wouldn’t even bother saving money [for retirement].”
Of course, the most obvious short-term benefit is the boost an RRSP provides to an income tax return. Every dollar saved in an RRSP is deducted from your taxable income. Make $50,000 and sock away $5,000 into an RRSP and you only pay taxes on the remaining $45,000.
Maximizing RRSP benefits
Sometimes, the best use of your RRSP contributions is to wait to claim them. In a low income year – maybe you’re a student or on parental leave, for example – you might be in a lower tax bracket. If you expect your income to rise in the near future, moving you to a higher bracket, wait to claim. By doing so, your contributions will defer a larger amount of tax, providing you a greater refund, says McBride.
Another tip for making the most of an RRSP is better suited for next year. If you haven’t already, change your saving behaviour. “It’s better to make contributions monthly or biweekly throughout the year,” says McBride, “so you’re not scrambling to find money at the end of the year.”
There’s more to that than reducing RRSP deadline stress. A rushed, lump sum investment puts you at the mercy of the market. If it’s high, you get less for your money. You’ll still hit some of those highs as a regular investor, but you’ll also cash in on deals when the market dips. Over time, says McBride, it averages out.
Invest cautiously in an RRSP
You likely won’t exceed the 2017 RRSP limit set by the government of 18 per cent of your income to a maximum of $26,010. The possibility is made even more remote since you’ll probably be carrying over unused RRSP room from the previous year, an amount described in your most recent Notice of Assessment from the Canada Revenue Agency.
That said, too much retirement savings can, in some cases, be bad. Keep in mind that your golden-years income will be supplemented by the Canada Pension Plan and other pension plans you might be paying into. Once you reach a certain amount of annual retirement income, the government cuts back on your old age security.
In other words, “You pretty much saved money to get less income at retirement,” says McBride. “It gets really tricky.” Which means you should get some advice.
Should that advice include borrowing to invest in an RRSP, however, consider getting a second opinion. “If you’re a conservative investor, the return is never going to exceed that interest rate you’re paying [on the loan],” says McBride.
Similarly, never put money toward an RRSP before paying off credit card debt or other high-interest loans. “The greatest investment will give you maybe a 10-per cent return over its 20 or 30 year lifespan, average.” An interest rate on a typical credit card, somewhere around 18 per cent, will more than cancel out your good intentions.
Don’t be too hasty to commit to a particular RRSP strategy. “You have to be careful,” says McBride. “Ask a ton of questions.” Get to know your provider – and the investment you’re entering into – by asking
- Are you a certified financial planner?
- If not, how much experience do you have?
- Are you permitted to locate and sell the best products available, or are you restricted to selling the products of a single financial institution?
- Can the recommended investment product be registered as an RRSP?
- Does the risk associated with it match my investment goals?
- What are the fees involved with this investment?
- What are the penalties for cashing out or switching to another product?
- Are you compensated through commissions on specific products you sell, or through salary and bonuses based on the amount of business you bring to your company?
All cautions and caveats aside, “If you expect your tax bracket to be lower at retirement,” says McBride, “you should invest in RRSPs.”
But even at peak of tax season aim for a measured response. Think about the future, do your homework, and, most of all, don’t rush into anything you’re unsure about. “A balanced strategy is the best,” says McBride.