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With the RRSP (registered retirement savings plan) contribution deadline coming up quickly, we decided to sit down with financial planner Pankaj Monga to get the answers to some common questions about this deadline and RRSPs in general.
Q1. Does it really matter if you contribute regularly to your RRSP as opposed to just dumping in all your money right before the deadline?
A. If you are a disciplined investor you should be contributing every month. But almost nobody does that (laughing). The answer is that from a tax advantage perspective, it doesn’t matter. But from an investment perspective it might.
This is because making regular contributions gives your money more time to potentially grow in the market. Also, another disadvantage of waiting until the last minute to invest your money is you don’t know what state the market will be in at that time of year – will you be buying low or high?
Q2. How does The RRSP contribution deadline affect Canadians who have taken money out of their RRSP for the Home Buyers’ Plan (HBP)? What do these people need to know?
A. When you use money from your RRSP to buy your first home it is like taking an interest free loan from your own RRSP. So you have to repay yourself by putting the money back into your RRSP.
The Canada Revenue Agency (CRA) gives you 17 years to pay back this money, but you don’t have to start making the annual payments until year 3. The amount you owe will be equally divided over the 15 years and if you don’t pay the money back each year, it will be added to your income and you’ll have to pay taxes on it.
This means Canadians who have used the homebuyers plan need to be aware of how much money they owe this year and ensure they pay it back by the March 1 RRSP deadline.
Q3. Do you actually get money back on your tax refund by contributing to your RRSP?
A. Yes. When you file your taxes you tell the Canada Revenue Agency (CRA) how much money you contributed to your RRSP that year. The CRA will then calculate how much income tax you’ve already paid on that contribution and give you that amount back in your refund.
Q4. At what age should you start contributing to your RRSP?
A. I think it’s more important to decide based on your income rather than your age. The whole concept behind an RRSP is that you want to use it to pay less tax. You do this by contributing money to your RRSP while you are in a high income tax bracket and then waiting to withdraw that money until you are retired, because at that point you’ll be in a low income tax bracket.
This is why I often advise clients who are currently in low income tax brackets not to contribute to their RRSP until they start making more money. You can only contribute so much money to your RRSP each year, but your contribution room is also cumulative. So you might as well save that space until you can take the biggest advantage of the tax savings.
If you’re in a low income tax bracket you might be better off putting your savings into a tax-free savings account (TFSA). But that’s a calculation you will have to do with your financial planner in order to determine what’s best for you.
Q5. RRSP investment portfolios are usually defined by their risk level. Since people shouldn’t be withdrawing money from their RRSP until their retirement, wouldn’t it make sense to always choose a riskier portfolio with higher growth potential?
A. Ideally, yes you should be more aggressive because an RRSP is supposed to be a longer term investment and by taking on more risk you should get more money back in the end.
But it’s a matter of individual preference. If watching your RRSP decline in value at certain points over the years will give you high blood pressure then you should be more conservative. A good financial planner will always work with you to determine your personal risk tolerance before they start advising you.
Pankaj Monga is a Certified Financial Planner (CFP) and has over 11 years of financial industry experience. In addition, Pankaj has CLU and CHS designations as well as several tax specialty courses. Pankaj is also a member of Million Dollar Round Table. He frequently appears on Omni TV on a show called South Asian Today. Pankaj specialises in estate planning, tax planning, investments, group and individual life, critical illness and disability insurance. You can learn more about Pankaj and contact him through his website.
Eric has an extensive background in content marketing and professional writing. He loves to write about personal finance and life insurance issues for the Lifenotes blog because he enjoys the challenge of making complicated topics fun for readers! Eric also covers community outreach initiatives.
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