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RRSP Tips: Give Yourself a Bonus

By Evelyn Jacks

I'm a Pisces, so I love RRSP season. It's always a double bonus for me: I know my birthday is coming up soon (always a fun day), and I know I will be contributing significantly to our wealth when making my family's RRSP contributions.

I find it interesting, though, that so few Canadians actually maximize their RRSP contribution room. Just under six million people in Canada belong to an employer-sponsored retirement plan, so for the vast majority the RRSP is THE retirement savings plan. Yet, close to 90% of Canadians have unused RRSP contribution room, which means they are underfunding their retirement income plans. And the amounts are large: we have missed contributing over $200 billion collectively1 since 1991, when the concept of RRSP contribution room was created.

Underfunding your RRSP is something you can afford to ignore if you think that living on $1400 a month from Old Age Security (currently about $500 a month) and Canada Pension Plan (just over $900 a month) will be enough. That's unlikely, though.

In a news release issued December 18, 2009, Statistics Canada2 reported that, on average, Canadian households spent $71,360 in 2008, which was an increase of 2.0% over the year before. Here's what's significant: personal taxes accounted for 20.5% of the average household's budget. This is by far the single biggest expense item for Canadian families. (The costs of shelter represented 19.9%, transportation 13.6% and food 10.4%.)

Even if you are frugal to a fault, your obligation as a taxpayer will continue to eat into your savings, and therefore your ability to spend later in life. No question, taxes will be your biggest lifetime expense, particularly if you think the solution to tackling recent deficits created to stimulate the global financial crisis will include higher taxes.

The RRSP, however, comes to the rescue of an uncertain future. It's a great hedge against an underfunded retirement and can solve immediate cash flow problems, too. Consider this checklist of benefits before March 1, 2010, the deadline for contributing to your RRSP for use on the 2009 tax return:

RRSP Benefits for you:

  • An Increase in Refundable Credits or Decrease in Clawbacks: An RRSP tax deduction on line 208 of the tax return which will reduce your family net income (the figure used to calculate refundable tax credits like the Child Tax Benefit) and your individual net income for the purposes of calculating any social benefit clawbacks of the Old Age Security and Employment Insurance Repayments.
  • Reduction in Taxes: An RRSP deduction will reduce federal and provincial taxes payable, which will increase your tax refund. You can use this money for reinvestment purposes; particularly important in a recovering market.
  • Increase Cash Flow: If you are required to make quarterly instalment payments, an RRSP contribution can help reduce them.
  • Tax Deferred Earnings: No tax will be paid on the accumulated earnings in the RRSP until withdrawal. This means you accumulate more money faster inside the RRSP investment than in a non-registered account.
  • Tax Free Withdrawals: The RRSP is not just for your retirement. Under the Home Buyer's Plan (HBP) and the Lifelong Learning Plan (LLP) you can withdraw money tax free to buy a home or go back to school.
  • Bad Debt Reduction: A bigger tax refund resulting from the RRSP deduction can be used to reduce "bad debt" like credit card balances which will free up cash for more lifestyle choices.
  • Reinvestment Opportunities: Your bigger tax refund can fund another RRSP contribution or an investment in your TFSA: Tax Free Savings Account, both great ways to build more wealth, faster.
  • Income Splitting Opportunities: A spousal RRSP can help you even out income levels in retirement.

Convinced? Here are the three things you need to do to take advantage of your RRSP investment opportunity:

  • Check it out: do you have unused RRSP Contribution Room? See last year's Notice of Assessment or Reassessment from CRA
  • Have you maximized your RRSP Contribution Room by filing a tax return every year since 2000? If not do so now.
  • Do you have the cash to make the contribution? If not consider flipping investments with accrued gains in non-registered savings into the RRSP.

Then just do it-but before March 2. I already have, and I plan to spend my birthday dreaming of my enhanced retirement options, as a result of my anticipated good fortune!

1 Statistics Canada, 1998, Frenken, Tapping Unused RRSP Room
2 Statistics Canada, 2008, Survey of Household Spending


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