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Stephen Murdoch, 37, pores over financial books in a library in St. Catharines, Ont. (glen lowson/the globe and mail/glen lowson/the globe and mail)
Stephen Murdoch, 37, pores over financial books in a library in St. Catharines, Ont. (glen lowson/the globe and mail/glen lowson/the globe and mail)

RRSP Season

What to do when you've maxed out your RRSP Add to ...

Stephen Murdoch is in an enviable position. He has plenty of time to prepare for retirement, and the financial flexibility not only to maximize the annual contributions to his registered retirement savings plan but also to engage in a much more multi-dimensional retirement strategy.

“We all know the economy’s shifting, and I want to ensure that long term, my family is well taken care of. They say not to put all your eggs in one basket, and I feel I’ve got a strong enough opportunity to build an overall portfolio such that I don’t have to,” says the 37-year-old public-relations executive, who is based in St. Catharines, Ont.

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Once his RRSP and that of his wife, Julie, are topped up, Mr. Murdoch makes sure both of their tax-free savings accounts (TFSAs) are maximized every year. He then contributes to a non-registered portfolio that also contains retirement proceeds.

Financial experts agree that Canadians who have the means to contribute more than the annual maximum to an RRSP ($22,450 for the 2011 taxation year, increasing to $22,970 in 2012) should do so. Then TFSAs should be topped up. Each spouse can invest up to $5,000 in after-tax money annually in the TFSA, which has been available since 2009.

The TFSA is a good complement to an RRSP because there is no age limit for closing out the TFSA, whereas the RRSP must be converted into either a registered retirement income fund or an annuity by age 71, says Adrian Mastracci, a founder and portfolio manager with KCM Wealth Management Inc., an independent fee-only portfolio manager and financial advisory firm in Vancouver.

Taxpayers should follow an intermediary step between topping up RRSPs and TFSAs, says Cherith Cayford, a facilitator with CMG Financial Education, a division of Victoria-based Camelot Management Group Inc., which provides financial and pre-retirement workshops and seminars.

“Repaying consumer debt is the best risk-free rate of return there is in today’s market, and so from a risk-free investment perspective, I think that’s the best place to go,” Ms. Cayford says.

People with yet more money to apply toward retirement can then consider tax-related strategies for their overall retirement portfolio, Ms. Cayford suggests.

Many financial professionals, including Ms. Cayford, advise that the ideal retirement portfolio from a taxation standpoint should consist of both registered and non-registered plans. The former, such as an RRSP or TFSA, would house instruments yielding regular interest that would otherwise be fully taxable outside of a registered plan. However, because funds inside an RRSP grow tax sheltered, tax on that investment income is deferred until the funds are withdrawn.

In contrast, it is generally better to have non-registered plans to sequester instruments such as equities, which yield capital gains, or instruments that provide dividends because these are more tax efficient. For example, only 50 per cent of capital gains are subject to tax. But if those investments are placed inside the RRSP, the tax efficiency is lost, and such gains would be fully taxable when ultimately withdrawn.

“To the extent you have securities or mutual funds that generate capital gains and dividends, you prefer to hold them outside of your registered plan,” says Frank DiPietro, director of tax and estate planning with Mackenzie Financial Corp. in Toronto.

Another option available to entrepreneurs of incorporated businesses after they’ve topped up their RRSP is to invest money in their business to enhance its potential salability and help finance retirement down the road. Small business tax rates in many Canadian jurisdictions are very low compared with personal tax rates (the lowest combined provincial and federal rates currently range from about 11 per cent to 19 per cent).

“For those individuals it can make a great deal of sense, as long as they don’t need the income personally, to leave any after-tax profits of the business inside the corporation, and build up a portfolio there,” Mr. DiPietro says.

For some entrepreneurs, under certain circumstances, it might even be advantageous to prioritize building up an investment portfolio in their corporation that can be used to fund their retirement (ahead of the RRSP), but that requires careful planning with the assistance of financial and legal professionals, Mr. DiPietro adds.

The same is true with setting up an Individual Pension Plan. The IPP is usually best suited to older individuals who run their own business and have high annual incomes. Somebody fitting that profile might decide, with the assistance of professional advice, that it is more advantageous for them to set up an IPP instead of an RRSP.

“The general rule of thumb is that if you’re a business owner over the age of 40 and have T4 income of about $130,000, that profile would generally be entitled to contribute more to an IPP than they would to an RRSP on an annual basis. This may provide the opportunity for additional tax sheltering,” Mr. DiPietro says.

Special to The Globe and Mail

For tips, stories, videos and live chats ahead of this year's RRSP contribution deadline, check the Globe Investor 2012 RRSP season section for daily updates.

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