Retirement Planning: Your RRSP

Contributing to your Registered Retirement Savings Plan (RRSP) is a smart and savvy way to save thousands of dollars every year by reducing your taxable income. If you earn income (YAY), then you can contribute up to 18% of it to an RRSP and any unused contribution space rolls over to the next year. The RRSP contribution deadline for the 2009 tax year is March 01, 2010. Here are three ways you can benefit financially from just making small contributions to your RRSP:

1. Pay Less Income Tax: Contributing up to 18% of your income per year lowers your taxable income and can save you hundreds and thousands of bucks. For example, a person earning $50,000 a year can contribute up to $9,000 to an RRSP and get a tax refund of about $2,925.

2. Deferred Tax: Unlike non-registered investments where income is taxed, the income earned in your RRSP is not taxed until the money is withdrawn. This means the investments in your RRSP can grow faster than those investments made outside of your RRSP. Some income types include: interest, capital gains, corporate dividends, trust distributions.

3. Special Programs: The main reason for the RRSP is to help Canadians save for retirement, but there are two special programs available to help you reach life goals, like buying a home or going to school.

• Home Buyer’s Plan (HBP): If you’ve got money in your RRSP, you can borrow up to $25,000 in 2009 tax-free to help purchase a first home. This loan must to be repaid within 15 years though.
• Lifelong Learning Plan (LLP) Looking to go back to college or university? Well, the Lifelong Learning Plan may be your tuition ticket, allowing you to withdraw up to $10,000 per year from your RRSP, to a maximum of $20,000. But like the Home Buyer’s Plan, you also have to repay this loan. The first repayment with the Lifelong Learning Plan is due either the 60 days after the 5th year following the 1st withdrawal OR the second year after the last year the student was enrolled in full-time studies — whichever is earliest.

Check out the Government of Canada website to find out more about RRSPs.

Where should you put your RRSP?

I’ve received a few questions from friends and readers asking me “Where should I put my RRSP?” To help you out, I’ve listed some RRSP options for various types of investors. The investment choices are many, just be sure to get your investment in before the yearly deadline or you won’t get the tax break.

1. Invest It: index funds or ETFs

Tracking the market with index funds and exchange traded funds (ETFs) is a very cost effective way to invest your dollars. Simply put, you cannot under perform an index and this form of passive investing keeps costs low. Here are two articles on indexing:

• What are Index Funds and ETFs?
• ING Direct Streetwise Funds Vs. TD Index e-Series Funds

2. Invest It: low fee mutual funds

If you’re not interested in indexing and investing for yourself, then perhaps invest in a diversified portfolio of low cost mutual funds to save big on fees known as management expense ratios (MERs)! Investing in low fee mutual funds costs around a 1.5% MER a year, where the bigger funds can run as high at 3%. Opting for lower cost mutual funds can save you tens of thousands of dollars over your investment years. Check out the Portfolio MER Calculator to tally the fees you’re currently paying on your mutual funds and get inspired to make a switch to lower cost alternatives.

Here are some lower cost mutual fund company options: Phillips Hager & North, Leith Wheeler, Steadyhand.

3. Park It: high interest savings account

Sometimes you just can’t decide where to invest your retirement dollars. For those of you looking for a liquid and risk-free place to park some cash, perhaps consider renting a spot in a high interest savings account. Don’t stay parked in these spots too long though as investment savings accounts barely beat inflation in the long term. Here are three of my favorite savings accounts:

• PC Financial: President’s Choice Financial offers an “Interest Plus RRSP Savings Account”. You will need to maintain a balance of over $1,000 to get PC’s best interest rate and an anniversary bonus.
• Achieva Financial: Maybe you haven’t heard of Achieva Financial? Well, let me introduce you to this division of Cambrian Credit Union in Manitoba. I’m not sure what’s in the Manitoban water, but credit unions in this fine Canadian province boast the highest interest rates in the country. Achieva’s “RRSP Savings Account” is an awesome option for those who want the best interest rate on parked retirement cash.
• ING Direct: The big orange machine that is ING Direct Canada hasn’t been too competitive with their interest rates in the past few years. They do offer an “RSP Investment Savings Account (RSP ISA)” though.

View all current interest rates before moving money to a savings account.

Now that you have some retirement planning options, I hope you get contributing to your RRSP sooner rather than later.