How to “find” the money to maximize RRSPs

Each year, as the Registered Retirement Savings Plan (RRSP) contribution deadline approaches – March 1, 2021, in case you missed it – Canadians scramble to raise enough funds to contribute to their retirement savings. An RRSP is a tax-deferred retirement savings vehicle in which to save money. The amount of annual RRSP contribution room is determined by your total earned income for the previous year. For example, the RRSP limit for the 2020 tax year is 18% of your gross income for 2019, or $ 27,230, The smallest.

The problem is to own high levels of debt to income, average Canadian households are not able to save enough to maximize their RRSPs. However, there are some strategies that Canadians can use to contribute more to an RRSP than they think possible.

1. Save automatically
There’s no better way to save than to set up automatic savings plans, says Lisa Elle, chartered financial planner based in Cochrane, Alta., And author of STRUT: How to eliminate the financial advantages of sexy shoes. “Set it up and forget it,” she said. “It becomes another automated invoice leading to forced savings and [helps] reinforce good habits.

Morningstar behavioral economist Samantha Lamas agrees, saying the best way to save money wrong is to set up automatic withdrawals. “Set up an automatic transfer from your current account to your savings account. Better yet, make sure you have the payment transfer as soon as you receive your paycheck, so you hardly feel the “loss”. To go further, create a structure where the amount transferred automatically increases after a certain time, ”she recommends.

Monthly dues divide a larger amount into smaller, more manageable portions and reduce the stress of producing a big hit at the end of the year. If you save monthly and invest regularly, so much the better.

“If you are in the top marginal tax bracket, this is one of the few tax deductions available to you,” Elle argues.

2. Emergency fund – To save money !
She recommends that you have an emergency savings account and contribute regularly. This way, Canadians can have funds available for emergencies without having to dip into their RRSPs, which could have tax consequences. Better yet, at the end of each year, any unused amount could be contributed to your RRSP.

“You can have a lot of excess money that can be better used to lower your tax bill this year, and then you can replenish the emergency fund throughout the year,” Elle explains.

3. Reinvest the tax return
The amount contributed to an RRSP is tax deductible. However, in this age of instant gratification and the YOLO (you only live once) mantra adopted by many Canadians, tax refunds often end up funding impulse shopping or beach vacations at the expense of income. future retirement plans.

She says one way to spice up your savings is to reinvest the tax refund in your RRSP. She explains the calculation using the example of a person in the top marginal tax bracket (around 40%) who puts $ 10,000 into their RRSP account each year and gets a tax refund of around $ 4,000. . “Because you know you’re getting that $ 4,000 tax refund, why not invest it in an RRSP,” she says. save.

“If you really want to buy that new toy or go on a trip, why not reinvest at least half of the tax refund. You will always get a big boost on your savings, ”Elle says.

4. Transfers from non-registered accounts
Don’t have real money to maximize your RRSP contribution? No problem. If you have investments in a non-registered savings plan, you can take advantage of in-kind asset transfers that transfer all of the securities in that account to your RRSP.

“It could be your stocks or your mutual funds, if you don’t want to sell them,” Elle explains. Upon such transfer, the account holder will receive an RRSP contribution receipt required to generate a tax refund. It’s important to note, however, that under Canadian tax rules, when shares are transferred to your RRSP, the transaction is considered a deemed disposition, which triggers capital gains tax even if you don’t. not actually liquidated these titles. However, Elle argues, “the RRSP deduction should help offset any transfer in kind from a non-registered account.”

There is also a way around the tax consequences of an in-kind transfer. If the transfer is made from your TFSA account, it “will have no tax impact on the transfer and you will still get your deduction for the amount contributed to the RRSP,” notes Elle. “We make sure that many clients first put money into their TFSAs throughout the year, and then we decide within the first 60 days of contributing exactly how much we want to transfer from the TFSA to the RRSP for. reduce their tax bill.

Of course, you have to make sure that they have enough TFSA and RRSP contribution room so that the CRA does not go after you for the overcontribution rules, which could be very costly.

If you choose to sell securities in your non-registered investment account and use the proceeds to redeem those securities in your RRSP, beware of the superficial loss rules. You will be denied a capital loss on your investment if you redeem the security within 30 days of selling it, even if you redeem it in an RRSP account. You must wait 30 days before redeeming the same security to claim a capital loss.

5. Borrow to invest?
Many readers ask us if they need to borrow to invest. This could be an attractive option for some, especially given today’s ultra-low interest rates. However, be careful.

Christine Benz, director of personal finance at Morningstar, warns that investors need to think carefully about what they can realistically earn from different types of investments. “In this case, there is a mismatch between a guaranteed bond (cost of borrowing) and return, which is uncertain regardless of where you invest unless you are in cash,” she says. “And with cash vehicles, you won’t come close to matching your borrowing costs.”

“Make sure you get it paid off as soon as possible, preferably with your tax refund,” Elle warns. The rationale is that the tax-sheltered growth of RRSP investments may exceed the cost of short-term borrowing.

Benz suggests thinking differently: “If you know that you have the money that you would use to pay off a loan each month, why not set up a regular investment plan and invest it each month instead?” Borrowing money to invest may be something that some sophisticated traders can engage in, but generally speaking, for small investors who manage their account, it adds risk, complexity, and cost – something that I do not recommended.

In conclusion, it is better to start planning your RRSP strategy for the next year as early as possible rather than waiting until the last moment, “because this is how you can really maximize your retirement savings and not end up with a big tax bill and no savings to be able to invest in your RRSP, ”says Elle.


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