Start contributing early in the year

If you’re like the typical Canadian, you probably wait until the “RRSP season” – the first two months of the year – to make your RRSP contribution. But coming up with the cash all at once can be difficult, especially for those who are still paying the holiday bills.

Instead, speak with your advisor about setting up a pre-authorized chequing plan (PAC). This simple investment strategy lets you purchase mutual fund securities on a periodic basis, such as weekly, monthly or quarterly, in a predetermined amount. Amounts as small as $50 per month are easily deducted from your personal bank account and invested in your RRSP.

Dollar cost averaging: an extra PAC plan benefit

By making regular contributions to your RRSP, it forces you to put saving ahead of spending. Over time, your savings will grow. When you invest a set amount of money each month, you can take advantage of a technique called “dollar cost averaging.” With dollar cost averaging, you enter the market gradually, buying more shares when the price is low and fewer when the price is high.

During a bear market, many investors wait until there are clear signs that the bear is over before committing money. Consequently, as the market recovers, a good portion of recovery gains are lost. Also, during a bull market, dollar cost averaging helps guard against buying large amounts at the top of the market when investments are most expensive.

Maximize your contribution

By contributing as much money to your RRSP as you’re allowed, you could get a bigger tax refund and improve your chances of building a rewarding retirement. If you don’t contribute your maximum amount, you can carry forward unused RRSP contribution room, which allows you to contribute at a later date.

A world of opportunities

In 2005, the federal government removed the 30% limit on foreign content for registered plans allowing for greater global portfolio diversification. Canada represents only 3% of the world’s stock market capitalization. With most of the world’s investment opportunities outside of our borders, global investing lets you diversify across economies and markets and participate in growth around the world.

Borrowing to invest can make it easier1

An RRSP loan can work in your favour if you pay it off promptly and if your RRSP is earning a good rate of return. When used properly and conservatively, borrowing to invest is a powerful strategy that investors can use to build wealth. Generally speaking, if considering this strategy, you should have a long-term horizon, mid-to-higher income, a stable job and the ability to repay the loan and interest.

Are spousal RRSPs still useful?

Spousal RRSPs have traditionally been used as an incomesplitting strategy in retirement. If you earn more than your spouse, you can contribute to your spouse’s RRSP but claim the tax deduction yourself. Your total contributions (to your own and your spouse’s plans) are subject to your own normal contribution limits. In retirement, withdrawals are taxed in your spouse’s hands rather than yours, as long as the contribution has remained in the plan for at least three years. So you benefit from their lower tax rate in retirement, while reducing your own tax liability during your working years.

But, in October 2007, the government introduced new pension splitting rules that allow Canadians to split pension income with their spouse. Is there still a place for spousal RRSPs?

Here are situations where the spousal RRSP is still useful:

  • If you are planning to retire before age 65 and don’t have a registered pension plan; spousal RRSPs allow income-splitting before age 65 whereas pension income-splitting normally begins at age 652
  • If you are saving for a home (each person can withdraw $25,000 under the Home Buyers’ Plan)
  • If you’re 71 or older and can no longer contribute to your own RRSP, you can still contribute to your spouse’s RRSP if you have earned income and your spouse is younger than 71
  • If you and your spouse want to make the balance of assets in your household more equal

1. Using borrowed money to finance the purchase of securities involves greater risk than a purchase using cash resources only. If you borrow money to purchase securities, your responsibility to repay the loan and pay interest as required by its terms remains the same even if the value of the securities purchased declines.
2. Registered Pension Plan income can be split before age 65.