RRSP DOS AND DON’TS
According to a recent poll conducted by TD Waterhouse, 61 per cent of baby boomers say they will use RRSPs to help fund their retirement plans. Surprisingly, that was slightly higher than the number who cited CPP/OAS as an important factor in their planning. If RRSPs are that central to the financial mix, it stands to reason that we had better get them right. So to end this chapter, I have compiled a list of RRSP dos and don’ts that sum up the main points I want to leave you with.
1. Don’t ask friends for advice.
There are a lot of misconceptions about RRSPs out there, so don’t assume that what someone tells you over lunch is necessarily right. Go to a reliable source. There are numerous books on the subject, as well as magazine and newspaper articles. The Canada Revenue Agency has a page that is a useful gateway to a wealth of RRSP information, and a Google search will turn up many more references.
2. Do choose the right plan.
I have not seen any precise numbers, but it’s a safe bet that billions of dollars of RRSP money is tied up in guaranteed investment certificates. The banks love GICs and promote them aggressively. Why not? They get to use your money for many years (five-year maturities are standard), loaning it out to others at higher rates and making a nice profit in the process. Meantime, your RRSP grows at a snail’s pace. My advice is to open a self-directed RRSP that gives you the maximum possible investment flexibility. Yes, it will cost you – the annual fee will probably be in the $100 to $150 range. But you should more than make up for that with much higher long-term returns. As mentioned earlier, an average annual gain of between 5 per cent and 6 per cent, which is realistic in a conservatively managed plan, will keep you ahead of inflation and build genuine value in your RRSP.
3. Don’t speculate.
Never forget that your RRSP is just a mini pension plan. That means you must think like a pension fund manager – protecting capital, avoiding unnecessary risk, and aiming for a reasonable return on investment. While all investments carry some degree of risk, there’s a wide chasm between prudent risk and speculation. Your RRSP is not the place to gamble. Keep it conservative, even dull.
4. Do contribute regularly.
I know you’ve heard this a million times. Well, now it’s a million and one. The easiest, most painless way to build an RRSP is to have automatic contributions deducted from your account each month. People who wait until RRSP season comes around often end up without any money to invest. They vow to do it next year but usually don’t.
5. Don’t blow the refund.
The tax refund generated by an RRSP contribution is windfall money. It’s like winning the lottery – it is all yours to keep, with no tax to pay on it. Depending on how much you contributed, we could be talking about thousands of dollars. The temptation, especially with younger people, is to spend it. I can suggest several better ideas that will build your personal wealth in the process. Pay down credit card debt. Pay down the mortgage. Contribute it to a TFSA. Put it back into the RRSP as the first contribution for the next tax year. Add it to your non-registered investment account. Just don’t blow it!
6. Do borrow, but carefully.
