Matching each saving option to your specific financial situation
Building savings can be challenging – after all, there are plenty of fun things to spend money on.
But the satisfaction of watching your savings grow will likely outlast the thrill of your latest online purchase.
To maximize your savings potential, you can add guaranteed investment certificates (GICs), mutual funds, segregated funds, stocks and bonds to your registered retirement savings plan (RRSP) or tax-free savings account (TFSA)1.
Accelerate your savings
Here are a few options you can consider making the most of your contributions:
- Pay yourself first with a pre-authorized chequing contribution plan
A pre-authorized chequing (PAC) contribution plan helps you make regular, automatic contributions to your investments. It’s “paying yourself first” by treating regular saving like any re-occurring payment. This strategy is more effective because contributing more frequently gives you the advantage of dollar-cost averaging.2
Talk to your advisor or investment representative about adding an option that gradually increases the amount you contribute over time. It’s like giving your investments an annual raise, which can make a big difference to your savings over time.
- Catch up on unused RRSP contribution room with an RRSP loan
An RRSP loan can boost your savings by allowing you to catch up on RRSP contributions3. By catching up on contributions using a loan, you’re giving your investments the most available time to grow4. It helps you now and, in the future, because it:
- Gives you more money earlier to grow your investment.
- Potentially creates a larger nest egg down the road.
- Reduces this year’s tax bill through an income deduction equal to the amount of your allowable RRSP contribution.
Borrowing your RRSP contribution doesn’t have to be costly and you can use any tax refund to help pay down your RRSP loan. This means you’re benefitting from tax advantages right away.
Despite the advantages, RRSP loans aren’t right for everyone.
- Contribute to a spousal RRSP
In a spousal RRSP, the higher income spouse makes an RRSP contribution and claims the tax deduction, but the other spouse owns the plan and the money in it. Spousal RRSPs are generally used to equalize income during retirement, lowering the overall family tax rate.
This type of plan can be an advantage if one spouse earns a lot more income than the other. Any contributions made by the higher income spouse will reduce their individual RRSP contribution room for the year but won’t affect how much the lower income spouse can contribute to their individual RRSP.
If money is withdrawn within three years of contributing to the spousal RRSP, all or part of this amount will be taxed as income to the spouse who made the contribution.
Karen McNamara, QAFP, CHS
Financial Security Advisor, Freedom 55 Financial
The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.
1 If you want to add segregated funds to your RRSP, you must be 16 years of age (18 in Quebec). If you want to add segregated funds to your RRSP, you must be 16 years of age (18 in Quebec).
2 Dollar cost averaging means investing smaller amounts at regular intervals, rather than saving up to invest in one lump sum. It can help you avoid jumping into the market at peak times by purchasing more fund units when values are low and fewer fund units when values are high.
3 While borrowing to invest has many potential benefits (investing an initial lump sum creates greater potential for compound-growth compared to making smaller regular investment purchases), leveraging also has potential risks (market volatility may result in poor investment returns and the possibility of owning more on the loan than the investments are worth).
4 RRSP loan proceeds cannot be used to fund TFSA contributions.