RRSPs – You're still the one

The time-tested RRSP is now in its 55th year. For most Canadians, it continues to be the best tax-saving and income-building investment for retirement.

The RRSP allows you to hold investments in a registered account where they can build tax-free until they’re withdrawn. These investments grow more quickly than they would outside of an RRSP, where you would have to pay a tax on the gains. And, your RRSP contributions are tax deductible.

So how can you maximize your RRSP opportunity? You’ve got a couple of months left to contribute for 2011 – the deadline is February 29, 2012 – so here are some tips to help you reduce your tax load and build a nest egg for retirement.

Maximize your RRSP contribution. The best strategy is always to make your maximum allowable contribution each taxation year. That way, you’ll get the most in immediate tax savings and maximize the potential long-term growth of the investments in your RRSP. Check the bottom of your most recent Notice of Assessment from the Canada Revenue Agency (CRA) to see how much you are allowed to contribute this year.

Contribute monthly. It can be a challenge to find a lump sum to invest as the RRSP deadline looms. What you may not know is that contributing a smaller amount each month has advantages over contributing once per year. How? By investing $250 regularly each month at a compound annual return of 8%, you’ll have $354,230 in your retirement nest egg 30 years from now.* But, if you wait until the end of each year to invest a $3,000 lump sum, you’ll have only $339,850. By investing monthly, you’ve added $14,380 at retirement without contributing a dollar more.

Catch up on past contribution room. You can fill your unused contribution room in a single year or over a number of years until the year you reach age 71 – but the faster you fill it, the better for additional tax savings and longer term tax-deferred, compound growth.

Borrow to save. Taking out an RRSP loan can be a smart way to maximize this year’s contribution or to catch up on your past contributions. The key is to get a loan at a low interest rate and pay it back as quickly as possible. You can even use your tax refund to help pay off the loan.**

Resist the temptation to withdraw early. RRSPs were designed for retirement savings, but your RRSP funds are always available to you. However, withdrawals attract tax at your marginal tax rate. The exceptions to this are the Home Buyers’ Plan and Life Long Learning Plan, which allow tax-free withdrawals with the ability to re-contribute. But remember that even in these plans you cannot replace the tax-deferred growth that was lost when you made the withdrawal.

We can provide you with more useful insights into RRSPs. With the right RRSP strategies as a key part of your personalized financial plan, you can save on taxes and retire with more.

* The rate of return is used only to illustrate the effects of the compound growth rate and is not intended to indicate future returns on investment.

**Borrowing to invest involves risk and may not be suitable in all situations. Speak to an Investors Group Consultant to see if this strategy is suitable for you.

© iStockphoto.com/nyul/Catherine Yeulet

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