The Registered Retirement Savings Plan (RRSP) deadline of February 29 (one more day thanks to the leap year!) recently passed. Were you one of those people making a late night appointment with your banker or investment advisor to top up your savings? If you were, did you feel a little like the student cramming for an exam — a student who would have been better of studying less over a longer term?
Yes, the same rules apply. Rushing to deadlines when it comes to tax incentives is not the best approach. Having an all-year plan when it comes to RRSPs, Tax Free Savings Accounts (TFSAs) and Registered Education Savings Plans (RESPs) is much smarter. Why? You’ll save more money, better see the big tax picture and generally make better financial choices.
To do now: RRSP
Plunking down a big RRSP payment in the last days of February is great for your taxes, but it’s not ideal for building your retirement wealth. That’s because the money was not sitting in the plan growing over the months of the year. That’s why most financial advisors recommend putting a healthy amount in each month, so your portfolio has those months to grow.
Donating throughout the year gives you a chance to plot out things like maximizing your contribution room. Your contribution room is the amount you’re allowed to give to your RRSP each year without penalty. That amount is either 18 per cent of what you made in the previous year or the RRSP contribution limit for the given year. The limit for 2012 is $22,970. As well, you can carry forward any room from previous years dating all the way back to 1991. You can figure out what your carry-forward room is easily by looking on your Notice of Assessment.
Meanwhile, if you plan now you can make an estimate of what your income will be for 2012 and have your accountant or advisor do the math to make sure you’re getting the maximum tax relief from your contributions as every dollar you contribute reduces your taxable income.
Utilizing things like spousal RRSPs (where the higher income spouse “gives” to the lower income spouse so the tax benefits go where you truly need them) are easier when you are looking ahead.
You still may do a top-up in February next year to make sure 2012 will go as planned. But that money might be to offset extra, unexpected income, not become your entire year’s tax planning.
To do now: TFSAs
As you are mapping out your RRSP plans for the year, don’t forget the value of the wonderful TFSAs. They’re a really useful tool for saving money for a future renovation or vacation as well as retirement.
These accounts truly are tax-free: you don’t pay taxes on the money you earn inside the accounts and you don’t pay tax on the money when you withdraw it.
When you are making long-term tax and retirement plans, they can help. For instance, if you are looking at a retirement with a high tax rate (say you have a teacher or government worker in the family with a great pension), you can use TFSAs to put aside extra savings for retirement and you won’t get dinged so badly tax-wise in your retirement years. As well, people with relatively low incomes who don’t need the RRSP tax breaks can use TFSAs to sock money away. And in general, since they are registered programs and you must call the bank or your advisor to pull money from them, they are simply great savings devices.
To do now: RESPs
I don’t know about you, but I have no idea if my kids’ RESPs are doing what they should. I just never check: but this time of year is an excellent time to do so. Make sure you are properly registered to get the Canada Education Savings Grant and the Canada Learning Bond and that you are putting enough money into your child’s plan to get the maximum amounts. See Revenue Canada’s web site here for more information.
Just like an RRSP, an RESP grows faster if you give money throughout the year. That means putting away a small amount ($50 to $75 a month, for instance) to maximize your savings.
To do now: check your investments overall
While you’re doing all this investment spring cleaning, take some time to look over the paperwork your bank or investment advisor is sending to you to see how well your investments have been doing over the last year. Book an appointment to make sure the savings accounts, money market funds and mutual funds that hold your money are doing well, or at least well enough. Talk to an expert about what’s going on in the markets and what’s expected to happen this year. Make sure you are getting your money’s worth in terms of fees and the like.
Saving for the future is a never-ending responsibility. It would be nice if the business just took care of itself. But it doesn’t and thinking about your approach once a year, sadly, is just not enough.