Tips for making the right decision before March 1
When certified financial planner Tannya McBride (Bachelor of Applied Business Administration - Finance ’07) was a financial adviser, the days leading up to the annual Registered Retirement Savings Program deadline tended to be hectic.
Often, quitting time pushed 8 or 9 p.m. as panicky clients hurried to beat the clock and make the most of this savings tool. While the effort is worth it in the long run, McBride advises keeping your cool. That means pausing to identify goals and asking important questions about how best to achieve them.
Here are some ways you can make the best decisions for you and your money as we approach the annual RRSP deadline of March 1.
But first, a definition
First, the basics: What is an RRSP? “An RRSP is an account that 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 you don’t pay taxes on income the account earns until you cash it out at retirement.
An RRSP 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.
Understand (and embrace) the benefits
“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].”
There's a short-short-term benefit too, in that an RRSP can boost an income tax return. Every dollar saved in one is deducted from taxable income. Make $50,000 and sock away $5,000 into an RRSP and you only pay taxes on the remaining $45,000.
Consider defering the 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, says McBride.
Know the limits
You likely won’t exceed the 2022 RRSP limit set by the federal government of 18% of your income, to a maximum of $29,210.
That said, too much retirement savings can be, in some cases, a bad thing. 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 professional advice.
Be mindful of debt
Should that advice include borrowing to invest in an RRSP, 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% return over its 20- or 30-year lifespan, on average.” An interest rate on a typical credit card, somewhere around 18%, will cancel out your good intentions.
Avoid the deadline rush 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.”
What's more, a 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 with investments throughout the year, but you’ll also cash in on deals when the market dips. Over time, says McBride, it averages out.
Always ask questions
Don’t be hasty in commiting 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?
- 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?
- Can the recommended investment product be registered as an RRSP?
- Does the risk associated with it match my investment goals?
- What are the fees associated with this investment?
- What are the penalties for cashing out or switching to another product?
Don’t rush into anything you’re unsure about. Do your homework. Be guided by the financial future you envision for yourself.
“A balanced strategy is the best,” says McBride.