Making the most of your RRSP
Six Tax Tips
When it comes to saving for your retirement, you just can’t beat the tax advantages offered by your Registered Retirement Savings Plan (RRSP). Here are some tips on making the most of your RRSP.
1. Maximize your RRSP contributions every year
Not only are your contributions tax-deductible, they also grow on a tax-deferred basis. In other words, you don’t pay taxes on the investment income earned within your RRSP, until you eventually withdraw it. This can result in significantly greater growth over time.
Make your maximum contribution every year and, if you have unused RRSP contribution room from previous years, catch up as soon as possible. Also consider contributing earlier in the year, or at regular intervals throughout the year. This can result in greater growth over time compared to contributing a lump sum at the end of the year.
2. Set the right asset mix for your life stage
Your RRSP’s risk/reward tradeoff is largely based on your asset mix between stocks, bonds and cash. Over the long term, stocks tend to perform better than bonds and cash. Since 1926, large stocks have returned an average of 9.6% per year, while long-term government bonds have returned between 5% and 6%, according to a 2009 report by Ibbotson Associates. Stocks tend to provide higher returns over 10-20 years, but fluctuate more in value. Bonds and cash tend to provide lower, but more consistent returns. How you balance these three asset classes largely depends on your life stage.
When you have 10 or 20 years to go before retirement, time is on your side, so you can afford to allocate more of your RRSP to stocks. As you approach retirement, it’s generally a good idea to add some more stability to your RRSP with a fairly even balance between stocks and bonds.
During retirement, shift your balance more towards bonds to provide income and stability. Allocate part of your portfolio to stocks to enhance the longevity of your savings, which is particularly important given today’s longer life spans.
3. Reduce future taxes now – with a spousal RRSP
In Canada, the higher your income, the higher your tax rate. Because of this, it can make sense to “split” your income with your spouse, so that you have two smaller retirement incomes taxed at a lower combined rate. The spouse expected to have the higher retirement income can split income by contributing to a spousal RRSP on behalf of the lower-income spouse, who will then receive income from the spousal RRSP during retirement.
4. Go global to reduce risk and enhance return potential
By diversifying your RRSP’s assets among different geographic areas, you can offset the impact of negative performance in one area with stronger performance in another. Canadian companies represent slightly more than 2% of the world’s stock market capitalization, according to a 2005 report by Sun Life Financial. By investing only in Canada, you ignore the other 98%, which includes many of the global technology companies, pharmaceuticals and global banks which are located outside of Canada.
5. Bring it all together
If you find it difficult to determine how much you have saved for retirement – or what rate of return you are getting on your savings – you could probably benefit from a consolidation strategy. By consolidating your savings into one overall plan, you can reduce the extra costs associated with multiple RRSP accounts, while making it easier to understand where you stand today, and where you will be tomorrow.
6. Making your 2017 RRSP contribution
The deadline for your 2017 contribution is Thursday, March 1, 2018. You can contribute up to 18% of your 2016 earned income to a maximum of $26,010, minus any pension adjustment from your 2016 T4 tax slip.
Susan Gottlieb is Vice President and Wealth Advisor with RBC Dominion Securities Inc. This article is for information purposes only. Please consult with a professional advisor before taking any action based on information in this article.
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