Now Is the Time to Implement A RRSP Strategy

By Randall Orser | Personal Income Tax

It’s time to think about your Registered Retirement Savings Plan (RRSP), the deadline is coming up, and you need to strategize what you’re going to do this year. We’re assuming you know what an RRSP is, and either have one, or know what to do to get one started. I will say this, please use an independent financial planner, as they are unaffiliated with any bank or institution and can invest your money how you wish.

The following are what you need to consider when developing an RRSP strategy:

  • What is my risk tolerance level?
  • What is my current income level?
  • What is my contribution room?
  • How much can I afford?

What is my risk tolerance level?

There are factors that can affect your risk tolerance level, time-frame, capital, investment objectives, and experience.

What is your time-frame for investing? What is your age now, and when do you want to retire? If you’re in your twenties, then your risk-tolerance may be high as you have a long time before you retire; however, sometimes at a young age we take too many risks, and you don’t want to be starting over again and again. As we get older we tend to get a more conservative, investing in more stable stocks and bonds, or government bills; however, that doesn’t have to be the case. You want to look at where you are now, and where you want to be when you retire, and figure out the things you need to do to get there.

How much capital do you have to work with? What do you have in RRSPs now? What is your net worth? How much risk capital do you have that won’t affect your lifestyle if you lose it? You need to look at these to determine how much you can risk investing. The more net worth you have, the more risk capital you can work with.

Do you understand your investment objectives? If you’re investing for retirement, are you willing to risk it all? You need to look at investments that fit your objectives. Trading futures in your RRSP is not necessarily the best route. Yes, it’s sheltered from taxes, however, the high level of risk may not be worth damaging your portfolio.

What’s your investing experience? Are you new to investing? Have you been doing this for some time but are going into new areas, such as options? You need to heed caution when going into new areas, and get some experience before risking too much.

What is my current income level?

To determine how much RRSPs to contribute for the year, you need to look at where your income level was, or will be. Generally, if you can you want to lower your income enough to go to the lower tax bracket. For example, if your income is $75,000 and the lower tax bracket is $65,000 then you need to contribute at least $10,000 to get into that bracket.

For the next year, do you know where your gross income will be? If you do, then now is the time to determine what you can contribute either monthly or by the next February. Once you know how much you need to contribute you can come up with a plan on how to afford it.

What is my contribution room?

Your registered retirement savings plan (RRSP) deduction limit, often called your “contribution room” is:

  • the amount that you can contribute to your RRSP.
  • the amount that you can contribute to your spouse or common-law partner’s RRSP.
  • the amount your employer can contribute to your RRSP.
  • the maximum you can deduct on your tax return, reducing your tax for that year.

 

The Canada Revenue Agency generally calculates your RRSP deduction limit as follows: the lesser of 18% of your earned income in the previous year, and the annual RRSP limit, which is $26,010 for 2017.

How much can I afford?

This is the big question you need to ask yourself. If you’ve determined how much you need to contribute to get into the lower tax bracket, you need to figure out how you can contribute that during the year, or save up for it over the year.

I believe that you’re better to contribute throughout the year, at what you can afford monthly. If you have some extra funds come February, then top up what you’ve contributed during the year.

What’s your strategy going to be for your RRSP this year?

 

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