Here are five timely tips that will help you maximize the benefits of RRSPs for your future.
1. Work out how much you’ll need to retire
In general, you need between 50 to 70 per cent of your current annual income for retirement. However, the amount you need to invest to realize your target retirement income can be affected by several factors. These include your retirement age, lifespan, investment growth, your retirement spending, your tax rate after you retire, and any additional income you may receive.
To help with planning, crunch the numbers for various investment scenarios and how these numbers affect your retirement finances. Use this information to determine an action plan for regular RRSP investments, through pre-authorized payments to your portfolio with each pay cheque.
2. Tackle both debts and your retirement investments
Make it a priority to pay down high interest debt, but don’t let debt payment be at the expense of your long-term financial well-being. If you see your debts and your RRSP as either-or options, you will likely pay down your debts (a financial obligation) and neglect your RRSP (a choice you can push off).
If debt and other financial obligations are competing with your RRSP investments, your financial planner may be able to help you develop a plan that works for your situation. Often a small, regular investment can go a long way and you might be able to find the money by budgeting and reduced spending.
3. Determine which registered investment account works best for you
The RRSP and Tax Free Savings Account (TFSA) are both registered accounts that provide alternate options for retirement investments. It’s important to understand their differences so you can decide which is better for you. For example, RRSP contributions are tax deductible, while TFSA contributions are not. RRSP investments grow in a tax-deferred account, while assets in a TSFA grow in a tax-sheltered account. Also, you can use RRSPs only for retirement investments, while you may use a TFSA for general savings/investments, in addition to retirement.
If you’re finding it difficult to choose, answering a few key questions can point you in the right direction. If you need guidance, discuss your situation with a financial planner.
4. Consider tax reduction strategies like spousal contributions
RRSPs reduce your tax since most contributors will likely be in a lower tax bracket when they withdraw the funds while they’re retired. But depending on factors such as other income you receive, the tax can vary.
Spousal RRSP contributions provide a good tax reduction strategy. It allows the spouse who expects to be in a higher income bracket in retirement to invest in his or her partner’s RRSP. When the spouse with the lower income withdraws the money in future, the couple will have a lower tax bill. Talk to your financial planner if you’d like to consider spousal RRSP contributions.
5. Keep your RRSPs for when you’re retired
Resist the urge to draw on your RRSP investments before you retire. You want to keep your RRSP for what it’s intended for—your retirement nest egg.
Exceptions to this principle are withdrawals under the Home Buyer’s Plan to purchase a first home or using part of your RRSP to finance your education through the Lifelong Learning Plan. Withdrawals under these two plans may be justified “investments” (in real estate and in your career). But only withdraw amounts you can repay as soon as possible, so your retirement is not affected.
There’s a lot to know, but it doesn’t have to be complicated.
Book an appointment with a financial advisor who can answer your questions and help get you set up for a blissful retirement.
