Rhonda's Financial Blog

11 tips to make the most of your RRSP

Monday, August 29th, 2011

Your registered retirement savings plan is a key to making sure you have enough money when you retire. Although this is an essential retirement planning step, many consumers don’t know how to maximize this type of investment. With these tips, you can make sure to make the most of your RRSP and get the benefits that you’re looking for.

Retirement Planning Tips for your RRSP

1. Start early – As soon as you earn an income you can start contributing to an RRSP, all the way up to the age of 71. It pays to start early and benefit from the compound interest you accrue over time. Even if you only contribute a small amount each month, it will add up. Start with a $25 savings per month at the beginning of your career vs. trying to catch up at age 40. The sooner you start with retirement planning, the better.

2. Contribute the maximum if possible – You can contribute up to 18% of your earned income up to the maximum (in 2011, the maximum is $22,450). Try to get as close to that maximum as possible. Look at your “Notice Assessment” from the Canada Revenue Agency (CRA) to see how much you can contribute. Make monthly contributions to the RRSP, make a lump sum contribution or consider taking out an RRSP loan to contribute. These loans often are available at prime or prime plus one. Once you take out the loan, you can pay it off with your tax rebate.

3. Catch up on the maximum if you haven’t contributed it – If you haven’t contributed the maximum to your RRSP in past years, it carries over into the future. You can use an RRSP loan to catch up with retirement planning.

4. Invest wisely – It is essential to get investment advice from a professional financial advisor. Depending on where you are in life, your financial advisor can help you find the right combination of stocks, bonds and cash. The right asset allocation is the key to achieving your required rate of return.

5. Use a spousal RRSP – With a spousal RRSP, you can take advantage of late in life income splitting. You can split 50% of your ‘eligible pension income’ between yourself and your spouse, which will lower the income tax you’d otherwise owe.

6. Use your RRSP for other life events – Although an RRSP is meant for supplementing your retirement income, you can also use it for other life events like lifelong learning or a home buyer’s plan.

7. Don’t use it for debt or lifestyle changes – There’s a difference between funding your learning and going on an all expenses paid cruise! Don’t use your RRSP funds to pay down debt or to pay for lifestyle costs. Only take out in emergencies or during years where you have lower income.

8. Know the tax facts – Your RRSP income is not taxed unless you make a withdrawal, so hold your highest taxed investments in your RRSP and your tax preferred investments outside your RRSP.

9. Withdraw from your RRSP conservatively – Be very cautious about what you draw from your RRSP as it gets added to your overall income for the year. If your new marginal tax rate exceeds the tax you have paid you will owe Revenue Canada more.

10. Claim your deductions – RRSPs come with a deduction each. Be sure you’re taking advantage of this tax benefit! You can always defer your deduction to a year when your income is higher in order to garner better tax savings.

11. Name a beneficiary –and update it if the circumstances warrant it (such as a death or divorce).

With this retirement planning advice, you can be sure to make the most out of your RRSP and be able to rely on it after you retire.