Maximize your RRSP today and reap the rewards
Year after year, many Canadians leave a key financial opportunity on the table by not contributing the maximum allowable amount into their Registered Retirement Savings Plan (RRSP). If your annual income tax assessment includes a notice from the Canada Revenue Agency that details how much unused contribution room you have left in your RRSP from previous years, the time to act is now.
For example, investing $10,000 into an RRSP that offers a 7% return, compounded annually could turn into $76,123 over the span of just 30 years. Plus, investing the full amount creates a larger income tax deduction that could result in a significant tax refund.1
Although it may seem difficult to find the money to contribute into your RRSP every year, we can show you a number of strategies to consider that can help accelerate your plan using assets you have readily available and key tax planning benefits.
Know Your Limits
It’s important to know how much contribution room you have, prior to sitting down with us to discuss your RRSP investment strategy. Each year, the Canada Revenue Agency identifies your unused contribution room for the upcoming tax year on your Notice of Assessment. If however, you are unable to locate your Notice of Assessment, a quick call to the Canada Revenue Agency at 1-800-959-8281 or a visit to www.cra.gc.ca can provide the information you need.
Invest Smart
It may be to your benefit to move money you currently have in savings accounts or other investments into your RRSP sooner, rather than later. Moving these dollars into your RRSP will not only result in a reduction of your annual tax bill – but it also allows you to maximize growth inside your RRSP, without generating immediate taxable income. It’s important to remember that interest earned on savings accounts and both realized and unrealized capital gains on non-registered investments will be taxed prior to when they are moved into your RRSP.
Invest Regularly
Consider working your RRSP contribution into your budget by using our monthly investment plan that automatically deducts a specified amount from your savings or chequing account on a regular basis and invests it into funds held inside your RRSP.
Monthly investment plans can be customized to work best for you. We will work with you to help determine the appropriate dollar amount and frequency. We generally recommend you begin by investing at least 10% of your earned income each month. However, it may make sense to invest more, if you have unused contribution room.
Consider the Benefits of Borrowing
In many cases, borrowing to take full advantage of RRSP contribution room makes sense. Maximizing your RRSP contribution now offers immediate tax savings this year and tax-deferred potential growth for many years to come. Using this strategy can make it beneficial to borrow for a short period to maximize your plan.
An Investors Group Consultant can help you determine whether a loan fits into your financial plan by looking at the following factors2:
Your Age – The impact of compound growth increases depending on the time that money is invested. While borrowing to invest may have more impact at a younger age, we can prepare an illustration that shows it’s never too late to save for your retirement.
Your Ability to Repay – We would never recommend that you borrow more than you could possibly repay because it could make it difficult to save for next year's RRSP contribution. Together, we will create just the right plan to make sure you can pay off the balance of your loan quickly and then start a regular investment plan to automatically take care of future RRSP contributions. In addition, contributing to an RRSP generates an income tax deduction that could result in a significant tax refund that could be used to help pay down a significant portion of the loan almost immediately.
Your Ability to Borrow - An RRSP Loan or Line of Credit available through Solutions BankingTM, like any other use of credit, will increase your Debt Service Ratio (the percentage of your monthly income that goes to pay off debts) and lenders rely on this ratio to determine your loan eligibility. When preparing your plan, we’ll be sure to take your complete financial picture and other borrowing into account.
An Investors Group Consultant can help you determine the best strategy for your personal RRSP investment plan.
1 Pre-tax RRSP investment assumptions – $10,000 investment purchased on January 1, 2007 at a gross rate of return of 7% over a 30 year period. The rate of return is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values or returns on investment.
2 RRSP Loan assumptions – Client takes out a 1 year RRSP loan of $10,000 at a fixed rate of 6% on January 1, 2007 and makes a $860.66 ($810.66 principal and $50.00 in interest) payment on January 31, 2007 . Client has a marginal tax rate of 40% and receives a tax refund of $4,000, which is used to pay down the loan on February 1, 2007 (remaining balance on February 1, 2007 is $10,000-[$810.66+$4,000] = 5189.34), which is paid monthly ($486.03) over the remaining 11 months.
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This article, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.
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