Financial Planning, Retirement Issues


Tax Efficient RRSP Investing

Tax Efficient RRSP InvestingWith the March 1st Registered Retirement Savings Plan (RRSP) contribution deadline for Canadians now past, the 2013 RRSP season has come to a close and time has run out, now is a good time for investors to save on tax now while saving for the future they want and plan for this year. While this post focuses on the Canadian system, Americans can follow the same general guidelines to maximize their retirement benefits as well.

When investing for retirement, no other registered plan offers tax advantages as compelling as the RRSP. Your annual RRSP contribution not only goes toward reducing the amount of tax you pay on income but your qualified investments grow tax-deferred within the plan until withdrawal, when you may be taxed at a lower rate after you retire. If you are a member of a company pension plan, you will even be better off by also having an RRSP. If everything goes well you will be able to collect your pension and your RRSP as well.

Tax Efficient RRSP Investing

Your RRSP can also be an insurance plan. More and more people are either losing their jobs, retiring early or finding out that their companies have gone bankrupt with no provision for the retirement benefits. Don’t depend on anyone else but yourself. Put a plan together which is diverse and plans for emergencies and unforeseen conditions. An RRSP is one of the building blocks for this plan.

The following tips may help investors invest efficiently and maximize their savings for retirement to ensure a retired life that is comfortable and allows you to do the things that you plan to do.

Know your contribution limits

As RRSP contributions are 18% of an individual’s earnings from the prior year, the amount of income needed in 2009 to generate the maximum contribution room of $21,000 is $122,222. Looking ahead, the RRSP contribution limit for 2010 has been increased to $22,000. If you were unable to maximize your contribution in previous years, you may be able to contribute even more than $22,000 for 2010.

While in recent years, RRSP contribution limits have been increasing by $1,000 per year, 2011 will mark the first year that the RRSP limit increase will be indexed to inflation, at $22,450, generated when 2009’s income is at least $124,722.

Leverage a Spousal RRSP

Higher-income earners can take advantage of their spouse or partner’s lower tax rate once they begin withdrawing from their RRSP in retirement by contributing to a Spousal RRSP now. Higher-income contributors receive a tax deduction for contributions made to their spouse or partner’s plan and spousal contributions do not interfere with the other spouse’s or partner’s own RRSP limit.

Remember that a Spousal RRSP does not allow an individual to exceed their personal RRSP maximum contribution threshold which can be allocated between the individual’s own account and that of their spouse.

Remember RRSPs are for more than retirement

RRSPs can be used to invest in financial goals other than retirement, such as education or a first home. First-time homebuyers can withdraw up to $25,000 tax-free from an RRSP under the Home Buyers’ Plan (HBP) and can repay the funds, interest-free, over a 15 year period. However, failure to repay will cause the amount to be included in income.

Under the Lifelong Learning Plan (LLP) investors can also withdraw up to $10,000 in a calendar year and up to $20,000 in total from an RRSP to help pay for training or education for yourself or your spouse or partner. The LLP withdrawal must also be repaid, over a 10-year period to avoid having it included in income.

Even though early with drawls generate taxable income, sometimes you will have no choice but to with draw early to replace lost income. This is not something you should plan to do, but it can be part of your income insurance plan.

Contribute early, contribute often

If you can afford to contribute to an RRSP, do so. It’s never too early to start contributing but you might regret not doing so sooner as with all investments, the more time you can give your plan to grow, the better.
Many investors find it much easier to make small but regular contributions than to come up with large lump sums annually. Consider setting up a regular investment plan to help make contributing to your RRSP a priority all year long.

After making your RRSP contribution, apply to the CRA using Form T1213 for a reduction of payroll tax at source. By doing so, you can benefit from your tax reduction throughout the year on each pay check, instead of waiting until you file your tax return in the spring of 2011.

Discuss your plans with your adviser

Make time to discuss your options with a professional financial adviser.
Remember, you’re building a long-term plan so take time to sit down with an advisor, get their help in choosing the right solutions and get started today in saving for the retirement lifestyle you want. Also discuss your plan with your spouse and make sure that he or she knows where you are invested and what your contributions are. Involve your spouse in discussions with your financial advisor. Both you and your spouse should have joint financial plans with similar goals, practice diversity, and avoid investing in too good to be true investments. Before you leap, talk it over with someone and think about it for several days.

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