4 tips to help you get more out of your RRSP

July 28, 2015

Investing in your Registered Retirement Savings Plan can be difficult, but these tax-efficient saving tips will help you get more out of your contributions.

4 tips to help you get more out of your RRSP

1. Minimize your taxes

  • If your spouse or partner is in a lower tax bracket than you are, consider shifting your savings into their name as they will pay less tax on the interest.
  • By investing in a spousal RRSP, couples can accumulate interest tax-free, and the high-income earner would get a hefty tax deduction. This is ideal for couples whose incomes border different tax brackets.
  • Hire your spouse and kids to do some work. Stay-at-home parents and children can earn up to the basic personal amount completely tax-free — that's more than $600 a month.
  • As of 2005, anyone aged 69 or younger can contribute up to 18 per cent of last year's income, to a maximum of $15,500 a year to a RRSP. After that, the amount will be indexed to the average national wage.
  • You can invest your RRSP money in almost anything you can think of, including Guaranteed Investment Certificates (GICs), term deposits, stocks and bonds.

2. Choosing the right investment

  • Saving tax is important, but it's even more important to choose the investment that's right for your personal circumstances. As any financial adviser will tell you, never let the tax tail wag the investment dog.
  • Research shows that ignoring the tax impact of investing can cost you between one per cent and five per cent per year in returns. Although stashing some cash away for the future is an admirable first step towards a cushy retirement, it won't do you much good if you're losing money on it. And that's always a possibility if you don't take into account the taxes you pay on your earnings.
  • Probably the first principal of tax-smart investing is to shelter the investments yielding the highest amount of taxable earnings in your RRSP. Then, if you've still got cash left over for investing, use your open account for truly tax-smart investments.

3. What to keep in your RRSP

  • Interest-bearing investments like bonds, bond funds, cash and GICs, because earnings are taxed at the same level as income (up to 47 per cent).
  • Stocks that regularly pay dividends, income or other distributions. If you're in the top marginal income bracket, you'll pay about 31 per cent tax on dividend income from Canadian stocks and 46 per cent on dividend income from foreign stocks, even if you just reinvest the earnings.
  • Stocks or equity funds that you don't intend to hold for the long term, or mutual funds that are heavy traders (like sector rotators) because you're forced to pay tax on the earnings as soon as you sell.

4. What to leave out

  • Buy-and-hold stocks or mutual funds. You're not taxed on capital gains until you sell your investment or the money manager sells and distributes the gains to unit holders. The easiest way to avoid tax in the short term is to avoid selling any assets with accrued capital gains.
  • Canadian stocks or equity mutual funds that pay out dividends. That 31 per cent tax bite on dividend income still beats the 46 per cent tax on interest income.
  • Any investment that might be a money-loser, including risky stocks or specialized mutual funds that you're taking a flyer on. You can't write off losses inside your RRSP. Outside the RRSP, you can at least use your capital losses to offset any capital gains made in the last three years, or you can carry the loss forward indefinitely, lowering your tax bill.

One word of caution: under the Canada Revenue Agency's superficial loss rules, if you (or your spouse, or your business) buy back into an investment 30 days before or after selling it at a loss, you won't be able to use the capital loss to offset current capital gains.

When you're ready to collapse your RRSP, you don't want to be faced with the burden of unexpected taxes. Make sure you get the most out of your RRSP by following these tips and contacting the Canada Revenue Agency for more information.

The material on this website is provided for entertainment, informational and educational purposes only and should never act as a substitute to the advice of an applicable professional. Use of this website is subject to our terms of use and privacy policy.
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