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Building your Financial
Success
With Alain Aube
Retirement Planning and RRSP's
Last minute RSP tune-up tips
If the fast-approaching Registered
Retirement Savings Plan (RRSP) deadline has you singin' the blues, take
note of these RRSP tune-up tips and you'll be humming a much happier
melody when your tax refund cheque arrives and later, during the
retirement of your dreams.
For 2005, your RRSP contribution limit is
18 per cent of your previous year's earned income to a maximum of
$14,500 (up $1,000 from the 2002 taxation year), minus the previous
year's pension adjustments - plus any unused contribution room carried
forward from previous years.
Here's the simple math on why it pays to
make maximum RRSP contributions each year:*
- At age 25, you begin investing $250 a
month in your RRSP ($3,000 a year). At age 60, assuming an annual
return of eight per cent, your RRSP nest egg will amount to $538,825
in pre-tax dollars
- Each year from age 25 to age 60, you
top up your RRSP contribution by $1,500 (the maximum amount allowed by
the government based on your income). At age 60, again assuming an
annual return of eight per cent, you'll have added $258,475 to your
retirement nest egg. And, for each of those 35 years, you'll have
gained an additional tax deduction for each $1,500 of top-up money you
invested.
Use these last minute tips to get the
biggest bang for your RRSP bucks:
- Fill up your carry-forward room: If
you haven't made your maximum allowable RRSP contributions for
previous years, do your best to play catch-up this year. There is no
restriction on how long you have to make up for missed contributions -
but the sooner you fill up that excess room, the better: First, you'll
get an immediate tax deduction for your entire contribution; and
second, you'll have more money working for you under the tax deferral
of your RRSP.
- Add the benefits of a loan: Borrowing
can be a smart way to maximize your RRSP contribution, or to
catch up on your past contributions. The key is to get the lowest
possible loan rate, which can make the cost of borrowing less than
your potential investment returns, if you keep the loan term short.
Whenever possible, try to keep the payback schedule to one or two
years. If you are borrowing a sizable amount to capitalize on
carried-forward contribution room, a term of up to five years may be
appropriate. Most financial institutions offer special RRSP loans with
payback schedules that can be tailored to your needs. You can further
reduce the payback period by using your RRSP tax refund to repay the
loan.
- Consider an 'in-kind' contribution: If
you have qualifying non-registered investments (which include such
common investment vehicles as mutual funds, stocks, bonds, guaranteed
investment certificates and government-guaranteed savings bonds) you
can choose to contribute them to your RRSP. This is known as an
'in-kind' contribution and allows you to claim the RRSP tax deduction
based on the value of the assets on the day of transfer. Be aware,
however, that by transferring capital assets (such as equities or
mutual funds) that have appreciated in value, you will trigger taxes
on realized capital gains. Alternatively, you will not be able to
claim a capital loss for tax purposes on transferred capital assets
with a market value less than the purchase price at the time of the
transfer. You could also face taxes on accrued interest if you
contribute a fixed-income security to your RRSP between payment dates
for interest. And, if your capital asset appreciates in value inside
your RRSP, the gains will be taxed as regular income and not more
favourably as capital gains.
Here's another tip you can take to the
bank: A financial advisor can help develop the RRSP strategy that works
best for you.
*The rate of return is used only to
illustrate the effects of the compound growth rate and is not intended
to reflect future values or returns on investment.
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