It’s RRSP season again and time to think about how to maximize your contributions.
So what’s the best way to go about it?
Kevin Cork, a certified financial planner based in Calgary, says in a financial planner’s dream world, everyone would line up on Jan. 1 and make their contribution for that year, then march off, happy as clams.
But the reality is that not everyone is able to max out their contributions every year, so the next best option is to contribute as much as you can.
“The number one reason to do the RRSP is the concept of building for retirement,” he said. “The way our social system is set up in Canada — and it’s one of the best in the world — it doesn’t provide anything even close to a reasonable retirement income for people.”
Whatever amount you contribute, make sure your money is invested wisely, he said.
“There are lots of stories about people who have plopped their money in an RRSP every year and then come retirement, they’ve found they’ve been putting their money into a daily interest account for the last 40 years and have almost no money to do anything with,” he said.
If you know nothing about finances and don’t want to spend more than five minutes a year thinking about your RRSPs, go for the “plain, vanilla, dull, balanced mutual fund,” he said.
As you become more comfortable with investing, try to develop an investment portfolio so your money has a chance to grow, he said.
When considering how much to contribute every year, Alim Dhanji, a certified financial planner with Assante Financial Management Ltd. in Vancouver, says it should be based on life goals.
“For beginners, they should seek guidance before making their contribution from a qualified professional such a CFP (certified financial planner),” he said.
For young people, having a financial plan is important because it helps prioritize goals such as student loan payments, saving for a home or saving for retirement.
Contributing to an RRSP helps develop good saving habits while at the same time preparing you for retirement. Dhanji recommends setting up a monthly RRSP contribution.
Tax-Free Saving Account vs. an RRSP
Jamie Golombek, managing director of tax and estate planning for CIBC, says that for people with lower incomes and in a lower tax bracket, it may make more sense to contribute to a Tax-Free Savings Account instead of an RRSP.
“They could find that, upon retirement, they’re actually in a higher tax bracket than they are right now,” he said.
In that case, their money will be taxed at a higher rate when it’s withdrawn, upon retirement, than the rate the tax was deducted at when they contributed.
“For many Canadians, maximizing the TFSA should take priority over RRSPs,” he said.