Now’s the time for RRSP planning

Don’t wait until the last day of February!

Typically, you’ll get the RRSP contribution song and dance starting somewhere in January and lasting until the end of February. It’s really just a marketing push by financial institutions to scare you into giving them money in the first 60 days of each year. But that’s no way to do any serious RRSP planning. The better way is to start thinking about your RRSP contribution right now. You have lots of time to weigh the pros and cons, consult with your financial planner, and come up with some cash to contribute. Here’s what to do.

Registered Retirement Savings Plans (RRSPs) are still the best retirement saving and tax-deferral vehicle available to Canadians. Believe it or not, Statistics Canada reported that in 2015 (the latest statistics available), Canadians contributed $39.2 billion to RRSPs. That was up 1.5% from the $38.6 billion contributed in 2014. That’s a huge amount of money going into private personal retirement savings every single year. Not bad for something that many observers thought would take a hit from Tax-Free Savings Accounts (TFSAs), which were introduced in 2009.

What still makes RRSPs so attractive?

Basically, an RRSP lets you contribute 18% of “earned income” every year to a pre-set maximum. For 2017, the maximum contribution limit is set at $26,010. And the last day to make a contribution for the 2017 tax year is March 1, 2018. In addition, you can carry forward any unused contributions from 1991 on and use them as well. You also get a tax deduction on your contribution for a given year.

Here’s a money-making tip: If your RRSP tax deduction results in a tax refund, reinvest the refund in your RRSP right away to keep that compound growth working for you. If you begin at age 40, and contribute, say, $20,000 per year for 25 years, at an 8% return, you’ll retire with $1.7 million.)

Remember that your investments grow tax-free while inside your RRSP. You don’t pay tax until you withdraw funds from your RRSP at retirement. Usually you’ll do this by rolling over your RRSP into a Registered Retirement Income Fund (RRIF) or an annuity when your RRSP matures. At that point, you pay tax on income from your RRIF at your full marginal rate, which is typically lower than it is in your peak earning years.

The beauty of an RRSP is that you can put virtually any investment under its tax-deferred umbrella. Under the rules, so-called “qualified investments” cover a lot of ground. This includes, for example, cash and GICs, stocks, bonds, exchange-traded funds, mutual funds, options, annuities, mortgages, and even gold and silver. There’s a complete list of qualified investments on the CRA website.

Where do you find funds to make an RRSP contribution?

Despite what most people may think, there are ways to find the money to make RRSP contributions. Here are a few ideas.

Automatic deposits. Arrange with your bank or your employer (if they’ve set up a group RRSP) to automatically deposit funds to your RRSP with every paycheque. You set the amount. It’s just like any other withholding amount from your pay, except that this one remains in your hands as an RRSP contribution. And contributing through the year gets your money invested and compounding that much sooner.

Severance payments. If you received a severance payment in 2017 (and you haven’t already blown it on something), use it to make an RRSP contribution. That way, you’ll shelter some or all of the severance amount from income tax.

Inheritances. If you’ve received a substantial bequest in the year, use at least some of it for an RRSP contribution. Bequests themselves are generally not taxable as income, but any investment income from that bequest is. If it’s in an RRSP, investment growth is tax-sheltered until your RRSP matures. Plus you get a tax deduction for the year of contribution. Beware of overcontributing, however, and be careful not to attract the Alternative Minimum Tax by making a large contribution, even if it’s within your limit. Your financial planner can help here.

Contributions in kind. If you have qualifying investments outside an RRSP in a non-registered account, consider transferring some of them to an RRSP. Their current value will be deemed to be the contribution amount for tax purposes. Any qualified RRSP investment will do, but bear in mind that there will be “deemed sale” of the asset you’re contributing, and 50% of any capital gain may be taxed. However, the upside is that you’ll get a tax deduction on 100% of your contribution. To make contributions in kind, you’ll need a brokerage account or have a self-directed RRSP that lets you pick and choose your own investments. Again your financial planner can help.

Borrowing. Some advisors advocate borrowing to make an RRSP contribution, arguing that not only do you top up your RRSP, but you also get a tax deduction and you’ll be able to pay down the loan with your refund. But there are some downsides to consider. The biggest one is that borrowing your RRSP contribution means that you are levering your investment. If you borrow money to invest in equity investments in your RRSP, you run the risk of magnifying any losses that may occur. In other words, the value of your investment may end up being less than the value of your loan – never a good situation!

Eventually, of course, you must repay the loan with interest, regardless of what happens to your RRSP investment or anything else. People who jump into RRSP loans without thinking about the effect on their cash flow are usually in for a rude awakening, and are sometimes forced into liquidating RRSP holdings to repay the loan. That’s double-trouble because you pay tax at your top marginal rate when you withdraw funds from your RRSP.

There’s clearly much to think about when planning RRSP contributions. Don’t wait until the last week of February! Talk to your financial planner about your RRSP today.

By Robyn K. Thompson, CFP, CIM, FCSI
President, Castlemark Wealth Management Inc.

© 2017 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice.

Now’s the time for RRSP planning was last modified: October 23rd, 2017 by robyn