RRSP Season is 12 Months Long!
(March 2005)
By Tom Allain, CFP
A Registered Retirement Savings Plan (RRSP) is the best way to save for your retirement for two reasons: contributions are tax-deductible; and investment returns compound tax-free until your money is withdrawn from the plan. By not taking advantage of your RRSP contribution room every year, you lose out on the valuable tax-free compounding. It may not seem like a great benefit over one or two years, but over the long-term, this benefit is tremendous.
One of the best ways to maximize your RRSP contribution each year is to set aside a specific dollar amount every month. Many people refer to this strategy as paying yourself first. You'll be surprised at how quickly you adjust to the withdrawal, and how quickly your retirement nest egg starts accumulating.
Another advantage of making monthly contributions is called dollar cost averaging. Dollar cost averaging is a simple and convenient way to eliminate the guess work of knowing when to buy - allowing volatility to work in your favour. Purchasing a fixed dollar amount each month buys more of an investment when the price is low and less when the price is high. This disciplined strategy takes the guesswork out of investing, and it prevents you from trying to time the market. This strategy helps to reduce the total price paid for your portfolio, and helps to build stronger returns. In the long run, this technique is one of the best ways to take advantage of volatile markets.
You may wish to consider a spousal RRSP, which, by design, will lower your future taxes. Many couples are not aware of the advantages of spousal RRSPs, and are missing out on one of the few income splitting techniques that can lower their future tax bill. In using a spousal RRSP, you're essentially shifting retirement income from one spouse to the other in an attempt to equalize retirement incomes and avoid having one spouse in a higher tax bracket. By spreading future taxable income between spouses, your overall tax bill may be reduced.
If you contribute monthly to your RRSP and typically anticipate a tax refund after year end, consider filing a "Request to Reduce Tax Deductions at Source" (form T1213) with Canada Revenue Agency. This option reduces the amount of income tax deducted from your pay throughout the year. It's like getting back your tax refund on every paycheque instead of in a lump sum after year end. This will increase your cash flow on a monthly basis, and in turn, can make it even easier for you to make your maximum RRSP contribution.
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