According to the latest Statistics Canada data, close to 6 million Canadians put money into an RRSP plan last time out – which means roughly two thirds of those who were eligible to contribute didn’t put in a penny.
For many, that’s not likely to change – a recent poll conducted by Mackenzie Investments found that nearly seven-in-ten (68%) Canadians admit they’re “indifferent” when it comes to RRSPs – but you can certainly do better.
If you’ve been lagging behind, now is the time to start using up that idle RRSP contribution room you’ve carried forward from past years. Check the Notice of Assessment you received after you filed your tax return last year. It’ll tell you precisely how much in potential contributions you’ve been leaving behind.
Time for Some Catching Up
Each year that you let this number grow puts you further away from a successful retirement – which is why some people opt for a “catch-up” loan to make up contributions they’ve postponed. Keep an eye out for financial institutions offering promotional rates and deferred payments in the coming weeks.
Providing you’re not carrying too much debt already, the combined benefit of getting some additional cash back from a bigger refund and earning tax-sheltered growth down the road can make sense. Generally speaking, the higher your tax bracket, the more appealing this strategy becomes.
Put Your Money to Work Earlier
Even if you do generally contribute each year, you likely deal with your RRSP at the last possible moment, scrambling to beat the (this year it’s March 1) deadline. Assuming you can adjust your money clock just a bit though, there’s a smarter way to put your savings to work.
First off, make your current contribution today. Then try to make next year’s RRSP contribution as well, instead of waiting until the corresponding deadline in 2018. That gives you almost 14 extra months of tax-deferred growth each year on that second contribution.
Develop a Savings Regimen
If you’ve had trouble saving in the past, consider introducing a bit of automation. A small amount each month automatically deducted from your bank account can really help boost your RRSP. Scheduled transfers like this are less effective for today’s gig-economy workers though, since their income arrives in fits and starts – but help is at hand.
Although not yet available in Canada, “frictionless” mobile apps like Qapital or Digit help analyze your income and spending patterns and then yank some money out of your hands before you can fritter it away. You can set them to direct the proceeds to the appropriate account – thus making saving as effortless as spending.
The trick is to increase your savings rate every time you get an income boost. That way you won’t even notice that you had any more money to start with.
Get Some Help from the Boss
In many instances, your employer may be willing to help you develop the savings habit. While private sector companies don’t generally offer workers guaranteed pension plans any more, many do sponsor RRSP programs. Since most of these plans include company matching of employee contributions, you’re effectively leaving money on the table each year that you don’t participate.
Depending on matching formula, that employer contribution can be worth more than an annual salary increase. If your boss approached you and said, “We’d like to give you a two per cent raise,” would you turn you nose up at it? Probably not, but that’s essentially what you’re doing if you don’t enroll in your company’s group RRSP.
You’ll also improve your take home pay by signing up. When your employer makes direct contributions to your RRSP, it’s no longer required to apply withholding tax at source, as long as you can show you have sufficient RRSP contribution room available. To do this though, you have to file a Form T1213 (Request to Reduce Tax Deductions at Source) with the Canada Revenue Agency.
Have a Look at Your Portfolio
If you’re short of cash right now but still want to get some money working in an RRSP, another wrinkle allows you to transfer non-registered stocks you already own into your plan, claiming their current market value as a deduction.
Remember though if the stocks are worth more today than when you bought them, you’ll have to report the difference as a capital gain. Most likely the savings you realize from the RRSP deduction will offset the tax you have to pay though.
Don’t touch the losers, however. If a stock you transfer into your RRSP is worth less than what you paid for it, you won’t be able to claim the loss against any gains you may have already realized.
It’s Time to Get Started
Unfortunately, many people today pass on the opportunity to save for retirement early without realizing the beauty of compounding interest can really work its magic. Don’t be one of those people. When it comes to RRSP investing, nothing rings truer than the phrase “the sooner the better.”