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Managing Your Money
RRSPs 101 – easy info that saves taxes, raises your retirement income
January 2006
Most Canadians know that a Registered Retirement Savings Plan (RRSP) is among the best tax-deferred, income-building ways to save for retirement. But, sometimes, RRSP terminology and the various RRSP deadlines can be a little confusing. With one of the most important RRSP deadlines fast approaching, here is some essential RRSP information that will help you save on taxes this year and perhaps allow you to retire earlier with more.
Contribution deadline: You have until March 1, 2006 to make your contribution and get a deduction for the 2005 tax year.
Contribution limits: For 2005, you can contribute 18% of earned income as reported on your 2004 tax return to a maximum of $16,500. If you are a member of a registered pension plan or a deferred profit sharing plan, your contribution limit will be reduced by the Pension Adjustment reported on your 2004 tax assessment notice.
Unused contribution room: If you contribute less than your annual RRSP maximum in any year, you can make up for that shortfall in subsequent years. You have until the end of the year in which you reach age 69 to “fill up” your unused contribution room. You'll find the total amount of your unused contribution room on your Notice of Assessment issued by the Canada Revenue Agency.
Age limit: You can contribute to an RRSP until the end of the year in which you turn age 69. At that time, you must either cash out your RRSP (usually not recommended) or transfer the plan money into an annuity or Registered Retirement Income Fund.
Spousal RRSP: This is an RRSP owned by your spouse to which you can contribute and receive the tax deduction. You can also continue to contribute to a spousal RRSP beyond your 69 th year, until the end of the year your spouse reaches age 69 (provided that you still have earned income or other contribution room).
RRSP loans: If you don't have the cash on hand, you can take out a loan to enable you to make an RRSP contribution. This can be an effective strategy if the loan interest rate is low and you pay off the loan quickly. The interest on this type of loan, however, is not tax deductible, and borrowing may not be suitable in all situations.
Overcontribution: You can contribute up to $2,000 over your RRSP contribution limit without penalty. Although you won't get a tax break, you will enhance the potential benefits of compounding in a tax-deferred environment.
Pre-authorized contributions: By making regular RRSP contributions throughout the year instead of in a lump sum you may reduce your average cost per unit on mutual fund investments because more units are bought when prices are low and fewer when prices are high – and you'll have more money working harder and longer in your plan.
Asset allocation: This simply means spreading your investment dollars across the three main types of assets – cash or short-term equivalents like Treasury bills; longer-term interest-bearing investments like bonds; and equities such as stocks and mutual funds that invest in stocks. Your asset allocation plan should be tailored to your investment goals, time horizon, risk tolerance and other factors.
The right RRSP strategies will allow you to save on taxes and retire more comfortably. A financial advisor can help you make the right choices.
This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.
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