If you earn more than $46,000 per year, every dollar you contribute to an RRSP will increase your tax refund, or reduce your tax bill, by 28-55%. Here are three non-mutually exclusive strategies for taking full advantage of your RRSP.
1. Jump Start With an RRSP Loan
Unless you have been saving 18% of your earned income every year through RRSPs and Pensions, chances are you have accumulated a large block of available RRSP contribution room. At current rates, a $200 per month payment will pay off an $18,000 RRSP Loan over a 10 year period. With a few assumptions, this will generate an immediate tax refund of $6,000, plus, your RRSP investment will have grown to $32,000 by the end of the 10 year period, assuming a 6% average rate of return.
You can find your unused RRSP contribution room on your most recent Canada Revenue Agency Notice of Assessment. You can apply your deduction all in one year or divide it up over succeeding years, but it is best to use it before your highest taxable income years are behind you.
2. Pre-Authorized Savings Plan
If you employ one of the new account tracking apps, like www.mint.com, you might be shocked at how easy it is to find money to put into your RRSP every month. Once people implement a savings plan they usually find it easier to handle the reduced spending power than expected. Investing monthly, also known as "dollar cost averaging", is thought to be a good way to invest through times of uncertainty, which are always around the corner.
3. The RRSP Gross-up Strategy - Maximize Your Contribution Each Year
Set your monthly payments as high as you sustainably can. Then employ an RRSP loan calculated to match the amount of your expected refund each year. Under this plan, for example, you could set up monthly contributions of $500 x12 = $6000 and then get a Loan for $3,000 before the RRSP deadline and even defer payments for up to 120 days. Your total contribution for the year would be $9,000. The roughly 30% or $3,000 tax refund would be used to pay out the balance of the loan.
Some General Merits of RRSP Investing
RRSP Investments Compound Tax Free
Diversifies your investments beyond just the family home
Split Retirement Income with a spouse to minimize amounts taxed at highest rates
Defers Taxes until retirement when your income and expenses are likely to be lower
Creates a safety net against job loss - a time when taxable income is likely to be lower
Please email or call me to book a time to discuss your options!