RRSP or TFSA or Both?

Let Goals Drive Your Strategy Plan.
Beginning January 2009, contributing to investments in a Tax-Free Savings Account (TFSA) has been possible. And each year, while deciding on your TFSA contribution, you may also be considering how much to put into your RRSP. If you can’t max out contributions to both, review your savings strategy.

Both can work together

An RRSP-TFSA split may be useful if you have pension benefits that reduce RRSP contribution room, or to save more for retirement. You might use a TFSA to save for short-term needs or emergencies. You can use both to split income with your spouse. We can review your goals to set a suitable strategy.

Last year, as the headlines signaled doom and gloom, many Canadians turned away from contributing to their Registered Retirement Savings Plans (RRSPs). As the economy recovers, it’s even more crucial to get some solid advice on investment opportunities for your retirement — ahead of the RRSP deadline.

Nearly 40% of Canadians who took part in a recent national survey said they use the “pay yourself first” concept to build investment wealth.

By moving money automatically from a paycheque or bank accounts into an investment account, it’s impossible to spend it before you save.

A common way to pay yourself first is through regular RRSP contributions.  It’s easier to invest monthly than to scramble for cash during the seasonal RRSP rush. Plus, monthly mutual fund* purchases help you leverage the market’s ups and downs — your money buys you fewer fund units when prices are high and more units when prices are low, or at a discount.

If you make automatic monthly RRSP contributions, you can ask the Canada Revenue Agency (and Revenu Québec, if applicable) to allow your employer to withhold less tax from your pay.

The greatest benefit of paying yourself first can be psychological. After a few months, you’ll adjust to the lower cash flow, and won’t even miss the money. As it accumulates — out of sight and out of your wallet — you’ll build financial security in a meaningful way.

If payroll deductions aren’t possible, authorize a transfer from your bank account to coincide with your payday. Professional advice can help you determine how much you can afford to put aside each month, and highlight any alternative savings programs available.

What will you do the day after you retire?

You may want to take an extended trip — such as an African safari or a few weeks in Europe — to get a fresh perspective and launch your retirement.

Getting away from your everyday experiences, seeing how others live, and talking to fellow travellers could open up unexpected possibilities for your retirement.

Some people undertake a major project, such as renovating their home or vacation property. This kind of activity can help exercise other parts of the brain and body through design and manual labour. As well, it could create an enhanced living space for your own enjoyment.

Others prefer to take a break of a few months or longer to explore different options at their own pace. 

One trap to avoid is taking on too much too soon, so that you become even busier than when you were working. Retirement is not a void that needs to be overscheduled. Don’t miss out on the opportunity to taste and savour your newfound freedom.
 

10 Common RRSP Mistakes.

No matter what the markets are doing, RRSPs are still one of the best ways you can save for long-term goals like retirement. So take full advantage of them, and avoid making the following mistakes:

1. Missing a contribution. Skipping just one annual contribution of $5,000 could reduce the value of your RRSP by almost $17,000 at the end of 25 years (assuming a 5% annual rate of return). So, it’s important to contribute every year to take advantage of tax-sheltered compounding growth.

2. Indecision. If you’re rushing to meet the deadline, it’s easy to make a bad investment choice or none at all. So make your RRSP contribution in cash. Then, later, when you’ve carefully evaluated your options, transfer your ‘parked’ money into an appropriate investment.

3. Waiting until the last minute. Life is busy, so you may end up scrambling to contribute just before the RRSP deadline. A smarter approach is to put your savings on autopilot and have smaller pre-authorized amounts deducted from your chequing account regularly throughout the year. You’ll get the advantage of dollar cost averaging, improve your chances of maxing out your RRSP every year and get the advantage of tax-deferred compound growth working for you earlier.

4. Thinking only cash. If you don’t have enough cash on hand to contribute then consider moving investments from your non-registered plans to your RRSP. This ‘in-kind’ contribution can be made with various investments deemed eligible. Remember you’ll have to report any capital gains earned on your investments up to the date of the transfer.

5. Over-contributing. You’re allowed a $2,000 lifetime over-contribution. If you exceed this, you may be subject to penalties of 1% per month. So before making a contribution check the Notice of Assessment the Canada Revenue Agency (CRA) sent you for your allowable contribution room.

6. Dipping in prematurely. Cashing in a portion of your RRSP has significant tax consequences unless you’re doing so through the Home Buyers Plan or Lifelong Learning Program. First we’re required to immediately withhold between 10% and 30% of the amount withdrawn and forward it to the CRA on your behalf. Plus, your total withdrawal must be reported as income and taxed accordingly. In the end, the cash you’re left to spend may only be half of the amount initially taken out. So, cash in your RRSPs only as a last resort.

7. Forgetting to update beneficiaries. If you’ve had any major changes in your life, be sure to update who you’ve designated as a beneficiary.

8. Not consolidating. Spreading your RRSP accounts across multiple investment firms may result in additional account fees and over-complicate the tracking of your investments. Plus, in order to make proper recommendations anyone advising you should have a full understanding of all your holdings, and their combined diversification and risk. So consider consolidating all your RRSPs with us.

9. Not income splitting with your spouse. If you’re the family’s higher income earner you can invest some or all of your contributions in your spouse’s RRSP and claim the tax deduction. The big benefit comes at retirement when more equalized nest eggs can reduce your combined tax bite and mean more cash to live on.

10. Not getting advice. Talking to an investment expert on a regular basis can help you stay on top of your progress, your investments, and your options. If you find yourself making any of these mistakes, contact us to make an appointment for a one-on-one consultation with one of our trusted advisors which is associated with your branch. They’re here to help you take a fresh, smarter, look at your investments.

Even if you consider yourself a seasoned veteran within your finances, it is always great to keep up-to-date in the financial world.  Visit our online Synergy Solutions Centre, which offers a wealth of information on RRSPs, TFSAs and other topics in regards to investing for your future.

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