The RRSP half dozen

Six key rules for investment success

This year, the Registered Retirement Savings Plan (RRSP) contribution deadline for getting a 2018 tax deduction is March 1. You still have time to discuss the best strategy with your financial advisor. Each year I’m asked how to get the most benefit from an RRSP. I’ve distilled my advice into six key rules.

1. Contribute

Rule number 1: You can’t win if you don’t play. You can contribute 18% of “earned income” to an RRSP every year to a pre-set maximum (subject to pension adjustments and reversals). For 2018, the maximum contribution limit is set at $26,230 (it rises to $26,500 for 2019 contributions). Here’s the important thing: If you can’t contribute your maximum for the year, contribute as much as you can.

It’s best from both a cash flow point of view and for investment growth to make monthly contributions. The sooner you start tax-sheltered compounding in your RRSP, the better. Start off with small amounts, gradually increasing as your salary rises. Remember the magic of compounding. Even a $500 monthly investment compounded monthly at a relatively conservative rate of 6% will grow to $500,000 in 30 years.

You can also increase your contribution in a year by using “contribution room” you’ve carried forward from previous years. You’ll find the amount of your available contribution room on your 2018 Notice of Assessment from the Canada Revenue Agency. Also, consider reinvesting any tax refund you get as a result of your RRSP contribution. It’s found money. Use it to increase your nest-egg to a million or more.

2. Use your spouse as a tax break!

There are still many ways to split income and transfer credits between family members. But one of the very best is the spousal RRSP. For this one, you contribute to your spouse’s plan, and you get the tax deduction. However, your spouse gets the benefit of the tax-sheltered compounded growth in the RRSP. It’s a great way to get a tax break and keep it all in the family, too.

3. Do not overcontribute!

RRSP contribution limits are very generous. And as I said earlier, most of us don’t contribute to the maximum – ever. At times, though, you may find yourself in a position to contribute a massive amount to your RRSP – say you’ve come into a large inheritance or a large severance payment or won a lottery prize (that’s very, very rare, but it does happen). If you plan to contribute to extra funds into an RRSP, make sure you have enough contribution room in the current year, including any contribution room carried forward from previous years. If you overcontribute, you’re liable for a stiff penalty tax of 1% per month up to 60 months on excess contributions above $2,000. Plus, you have to file Form T1-OVP to report your overcontribution. If you don’t, you’ll be liable for more penalties and interest.

If you’re considering a large contribution, watch for Alternative Minimum Tax. If AMT rears its ugly head, consider deferring some of the RRSP deductions to a future year.

All in all, it’s vitally important to get your contribution right. Getting the advice of a financial planner would be prudent at this point.

4. Know yourself and invest wisely

For many people, an RRSP will be their only source of retirement income apart from the Canada Pension Plan. While RRSP-eligible investments include everything from individual stocks to bonds to mutual funds and exchange-traded funds, it’s not the place to speculate on junior mines or high-tech start-ups. Moreover, tax benefits like the dividend tax credit, the capital gains tax exemption, and the ability to offset losses against gains are lost within an RRSP.

Aside from not contributing to an RRSP at all, the RRSP investment choice is where most people go astray. Most of us tend to overestimate our capacity to deal with market volatility and take investment losses. Be realistic about your own tolerance for risk. Then allocate your RRSP assets accordingly. Here’s a summary of qualified RRSP investments:

* Bonds.
* Exchange-listed securities.
* Exchange-traded funds (ETFs).
* Mutual funds.
* Options.
* Money or cash deposits.
* GICs.

There are many other types of financial instruments that can be held by an RRSP, including annuities, mortgages, and even investment grade gold and silver bullion, coins, and certificates. Talk to your financial advisor to see which investments best suit your needs.

5. You can’t “save” a million bucks

When considering RRSP-eligible investments, remember that you’ll never be able to “save” a million dollars. The interest rates on so-called “savings” accounts are laughably small, almost invisible in fact. So expand your horizons, and look into various lower-risk, lower-cost investment funds, such as conservative, index-tracking exchange-traded funds, if you’re a more conservative investor.

6. Don’t break open the RRSP piggybank!

Your investments grow tax-free inside an RRSP. You don’t pay tax until you withdraw funds at retirement, and then you pay tax on the withdrawals at your full marginal rate, which is typically lower than it is in your peak earning years. If you withdraw funds for an RRSP in your peak earning years, you’ll pay tax at your top marginal rate and lose the benefit of all that tax-sheltered compound growth. While it’s important to use the tax-shelter benefits of an RRSP, it takes time, and that means you really should use the RRSP as a retirement plan – not a source of funds for a vacation or a new car.

Watch Robyn discussing the how to protect your finances when you’re going through a divorce on CTV’s “Your Morning.”

Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at rthompson@castlemarkwealth.com for a confidential planning consultation.

Notes and Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.