No matter what’s happening in the markets, an RRSP is still one of the best ways to save for retirement. You get tax benefits plus the magic of compound interest working for you. So here’s how to make the most of your Registered Retirement Savings Plan:
1. Save the max
Contributing your maximum is essential to taking full advantage of your RRSP. If you don’t have the money, consider an RRSP loan or using a line of credit. You’ll pay interest, but the compounding growth of your money over the long term may far offset the interest costs. Another smart move — use your tax refund to pay down the amount you borrowed.
2. Save sooner
Make your contribution as early in the year as possible instead of leaving it until the 60th day of the following year when the RRSP deadline is looming. You’ll benefit from up to 14 extra months of tax-deferred compounded growth.
Why is the RRSP deadline important?
- If you are now 55 and skip a single $5,000 contribution, you could end up with nearly $9,000 less in your RRSP by age 65, assuming an average annual return of six percent. If you skip a $10,000 contribution, that lost opportunity may rise to more than $17,900. The younger you are, the higher the potential cost. Using the same six percent assumption, skipping a $5,000 contribution at age 45 could cost you about $16,000 by retirement.
- Skipping a contribution at age 35 has an even greater impact on retirement funding. A single $5,000 contribution missed could see you lose out on more than $28,700; skipping a $10,000 could mean missing out on nearly $57,500.
- Opportunity cost is only part of the story. Not contributing also means not being able to claim a tax deduction that could reduce your tax bill or maybe even result in a refund. And the higher your earnings, the more valuable that deduction becomes.
3. Catch up
Use up your carried forward contribution room as soon as possible. If you can’t catch up in one lump sum, consider borrowing. Check the Notice of Assessment sent to you by the Canada Revenue Agency to find your unused contribution room.
4. Save for 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.
5. Save automatically
If you act on only one idea here, make it this one. Because the difference between retirement success and failure isn’t how much money you make, or how smart you are, but how well you conquer the all-too-human tendencies to procrastinate and under-save. So ask us to automatically route smaller, regular contributions from your chequing account to your RRSP. You’ll get the advantage of dollar cost averaging, you’ll probably save more, and there’s no more scrambling at RRSP season.
Using borrowed money to finance the purchase of securities involves greater risk than purchasing using cash resources only. If you borrow money to purchase securities, your responsibility to repay the loan and pay interest as required by its terms remains the same even if the value of the securities purchased declines.
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Dan and Mary have been consistent contributors to their Registered Retirement Savings Plans for decades.