RRSP Consumer Tips
Here are 10 tips to make your RRSP contribution count this year.
TimingIt is time in the market, not timing the market, that counts. Those who try to time the market to buy low and sell high usually find the opposite happens. A buy-and-hold strategy works better than a buy-and-sell-and-buy-again strategy. However, you should review your portfolio regularly with your financial advisor to ensure it is performing as it should.
SimplifyDiversification is important, but 10 to 15 mutual funds in one plan may prove to be a headache. They may also cost too much in management and other fees. You need something you can track easily.
Global investingUp to 100 per cent of your RRSP can be placed into foreign investments. This option allows you to diversify your portfolio, reduce risk, and you can allocate your investments so that they are not concentrated in one market.
Borrowing for an RRSPIf you must borrow to maximize your contribution, use your income tax refund to pay down the loan as quickly as possible. If you pay the loan off within a year, this may be a good strategy. Have an advisor help you weigh the pros and cons of borrowing.
Invest earlyMake this the last year where you rush out to buy an RRSP hours before the deadline. You will be further ahead with a $100 monthly contribution than with a $1,200 lump sum payment at the end of the year.
Comfort zoneAlways ask for an easy-to-understand analysis of a fund's performance and history of the fund manager. Make sure you understand the risks involved in investing in the fund.
Equities vs. fixed incomeOver the long term, equities outperform fixed-income products. And interest from fixed-income products is most heavily taxed. However, equities carry more risk than fixed-income investments. Most portfolios should contain a mix of equities and fixed-income products, according to your risk tolerance. Here is where a financial advisor is essential in helping you plan.
Plan with your partnerYou can use your RRSP room to contribute to a spousal RRSP. This doesn't affect contribution room for your spouse or common-law partner. A spousal plan can reduce the tax you pay after retirement when you are drawing down the RRSP money. The goal is to roughly equalize the income you each receive after retirement – a tax-planning technique called income-splitting. Count company pension plans, CPP/QPP entitlements, retirement savings, and other income sources when you plan together.
Starting earlyDo you have a child with a part-time job? Your child can start creating RRSP room for the future by filing a tax return even if he or she does not earn enough to pay taxes.