Year after year, many Canadians leave a key financial opportunity on the table by not contributing the maximum allowable amount into their Registered Retirement Savings Plan (RRSP). If your annual income tax assessment includes a notice from the Canada Revenue Agency that details how much unused contribution room you have left in your RRSP from previous years, the time to act is now.
For example, investing $10,000 into an RRSP that offers a 7% return, compounded annually could turn into $76,123 over the span of just 30 years. Plus, investing the full amount creates a larger income tax deduction that could result in a significant tax refund.1
Although it may seem difficult to find the money to contribute into your RRSP every year, we can show you a number of strategies to consider that can help accelerate your plan using assets you have readily available and key tax planning benefits.
Know Your Limits
It’s important to know how much contribution room you have, prior to sitting down with us to discuss your RRSP investment strategy. Each year, the Canada Revenue Agency identifies your unused contribution room for the upcoming tax year on your Notice of Assessment. If however, you are unable to locate your Notice of Assessment, a quick call to the Canada Revenue Agency at 1-800-959-8281 or a visit to www.cra-arc.gc.ca can provide the information you need.
It may be to your benefit to move money you currently have in savings accounts or other investments into your RRSP sooner, rather than later. Moving these dollars into your RRSP will not only result in a reduction of your annual tax bill – but it also allows you to maximize growth inside your RRSP, without generating immediate taxable income. It’s important to remember that if an investment with an unrealized gain is transferred into a RRSP, the capital gain must be reported in the year of the transfer, but only half of the gain will be included in taxable income. You will also have to report any interest or dividend income earned up to the time the investment is moved into your RRSP.
Consider working your RRSP contribution into your budget by using a monthly investment plan that automatically deducts a specified amount from your savings or chequing account on a regular basis and invests it into funds held inside your RRSP.
Monthly investment plans can be customized to work best for you. We will work with you to help determine the appropriate dollar amount and frequency. We generally recommend you begin by investing at least 10% of your earned income each month. However, it may make sense to invest more, if you have unused contribution room.
Consider the Benefits of Borrowing
In many cases, borrowing for a short period to take greater advantage of RRSP contribution room makes sense. Increasing your RRSP contribution now offers immediate tax savings this year and tax-deferred potential growth for many years to come.
Financial advisors can help you determine whether a loan fits into your financial plan by looking at the following factors2:
Your age – The impact of compound growth increases depending on the time that money is invested. While borrowing to invest may have more impact at a younger age, we can show you it’s never too late to save for your retirement.
Your ability to repay – We’ll ensure that you don’t borrow more than you should. Together, we will create just the right plan to make sure you can pay off the balance of your loan quickly and then start a regular investment plan to automatically take care of future RRSP contributions. In addition, contributing to an RRSP generates an income tax deduction that could result in a significant tax refund that could be used to help pay down a significant portion of the loan almost immediately.
Your ability to borrow – An RRSP Loan or Line of Credit, like any other use of credit, will increase your Debt Service Ratio (the percentage of your monthly income that goes to pay off debts) and lenders rely on this ratio to determine your loan eligibility. When preparing your plan, we’ll be sure to take your complete financial picture and other borrowing into account.