As the Feb. 29 deadline for contributions looms, here are five things to know about RRSPs:
— They allow you to defer taxes, not avoid them. You are able to deduct your contributions from your income, but when you withdraw the money in retirement, you will pay income tax.
— Your unused RRSP contribution room carries forward. If you don’t maximize your contribution for a given year, the unused portion carries forward.
— If you have a pension plan at work, that can reduce your RRSP contribution room. Depending on how generous your pension plan is, the amount you are able to contribute to your RRSP may be substantially reduced.
— Choosing between saving for retirement using your RRSP or tax-free savings account depends on the tax bracket you are in today and where you expect to be when you start withdrawing money from your RRSP.
— You can withdraw money from your RRSP under the home buyers’ plan and the lifelong learning plan, but if you do you must repay the money to your account within a set amount of time. It is generally 15 years under the home buyers’ plan, while under the lifelong learning plan it is generally 10 years.
A few tips
Here are tips on managing your money wisely inside or outside of your RRSP:
- Be clear about your financial goals and have a financial plan that shows the rate of return and therefore the best asset mix to achieve your goals.
- Be diversified, address all the risks, and take no more risk than necessary to achieve your goals.
- Don’t try to beat the experts by picking the best individual stocks. Use exchange-traded funds or professional money managers.
- Keep it simple.
- Be efficient from an income tax point of view.
- Know what fees you are paying.
- Insist on a report that shows performance compared to the proper benchmarks.