Invest in your future with an RRSP

Investing in your future could mean the difference between taking pleasure in your well-deserved retirement or just scraping by. March 1 is the deadline for investing in an RRSP, so start examining your options now.

Contributing to a RRSP is a decision only you can make but the money you invest now will keep on giving when you decide to retire.

Even though not all people can contribute a lump sum of money at the end of the tax year, most can have a plan that deducts a monthly or bi-weekly amount from their paycheck or bank account. Even contributing a small amount each month will go a long way when it comes to retirement.

RRSP’s are a good investment because:

• Your contributions are tax deductible which could provide you with a tax refund
• Savings in an RRSP’s increase tax-free.
• Earnings on RRSP’s are tax-free until they are withdrawn

Basic Rules:

• You can devote 18% of your earned income, up to a maximum of $19,000 (2007) or $20,000 (2008) 
• Unused contributions can be carried forward for an infinite period. If you come across some unexpected cash you may want to consider maximizing your RRSP fund to make up for any missed contributions in previous years.
• Wise investors use their tax refund to top up their RRSP or pay down their RRSP loan if they borrowed to make their RRSP contribution. RRSP loans can make a lot of sense if investors do not have cash on hand to make a contribution to an RRSP. Don’t borrow, however, unless you are able to make the payments
• Contributions must be made within 60 days of year-end. But you don’t have to wait until then.

By contributing early in the year, you take advantage of tax-sheltered capital appreciation and interest accumulation.

Do’s and don’ts of investing in an RRSP

• Don’t wait because you think you can’t afford it. Try to cut down on unnecessary expenses and dedicate that money in an RRSP so it can compound in a tax-deferred account. Even a small monthly sum deducted from your paycheque is better than none at all
• Do gather the benefits of the tax break but don’t make that your lone goal. Long-term saving in an RRSP allows you to defer taxes but if you dip into the funds, you’ll have to pay penalties and taxes on the withdrawals. Up to $20,000 can be withdrawn without penalty for buying a home or entering full-time education
• Do use your tax refund and borrow if you must to maximize your RRSP contribution. Canadians had $245 billion in unused contributions remaining over last year. Don’t postpone repaying your loan if you borrow because you'll pay a great deal in further interest charges
• Do consider that even if you are over age 71, you may have earned income and RRSP contribution room. If your spouse is under the age of 71 or you have income from entrepreneurial ventures or employment, you are still eligible to make a spousal contribution and claim the deduction
• Don’t forget your RRSP has to be transformed on or before your 69th birthday. It can be converted to a Registered Retirement Income Fund with the provision that withdrawals are made annually, while taxes are deferred on the rest of the assets.

Making the most of your tax refund

There are many options when you receive that nice tax refund cheque. You could spend it on a dream vacation or a new toy but before you do, think sensibly. You’ll probably figure out that luxury items will be far down your list of priorities.

Using your refund to pay down debt or save for retirement or education may be the more practical solution. Saving money isn’t as much enjoyable as spending it, but being debt free and secure in your retirement is an option that’s hard to beat.

Debt Reduction

• If you have debt, reduction is probably your best option. Big balances on your credit lines and charge cards can accumulate a lot of interest and seriously limit your ability to build assets

Take a chunk of your mortgage loan

• If you own a house, a mortgage is likely your most significant debt. Depending on how close you are to retirement, it could make sense to pay off your home loan instead of devoting the extra cash to retirement savings. But keep in mind there may be penalties for early pay downs and if your interest rate is low, you might want to continue making payments

Contribute to an RRSP

• The tax benefits of using your refund to contribute to a RRSP are immediate. You receive a tax reduction and over the long term, any returns you earn on your investments are tax-deferred
• An RRSP generates compound interest, meaning that what you invest today will be worth substantially more when you retire

Contribute to an RESP

• Canada Education Savings Grants — the government adds up to $400 annually per child based on your contribution making tax refunds transformed into RESPs more attractive. Assets are sheltered from taxation, similar to an RRSP.