Some ideas are just plain bad. I think of performance artist Linda Montano, who once completed a project where she tied herself to a man (another performance artist), 24-hours-a-day, for one year by a six-foot piece of rope. Bad ideas might also include anthropomorphic taxidermy, which is the practice of preserving the body of an animal and displaying it in such a way as to endow it with human characteristics (I didn't get it either – just Google it).
Now, I will be the last person to say that contributing to your registered retirement savings plan by the March 2 deadline is a bad idea. For most people, socking away money in an RRSP is the right thing to do. After all, you'll be investing for the future, enjoying tax savings today from the RRSP deduction, and experiencing tax-free growth inside the plan along the way. It's all good.
But if you've got limited financial resources – and who doesn't – it's at least worth looking at other options for your hard-earned money. Some of these may be a better idea in your situation. Here are five ideas to consider.
1. Pay down your mortgage.
Consider making a lump-sum payment to reduce your mortgage principal owing. Take a look at the interest rate on your mortgage and compare it with what you expect to earn in your RRSP.
If your mortgage rate is, say, 3.5 per cent, then paying down your mortgage will provide a guaranteed 3.5 per cent after-tax rate of return. If you expect to earn 3.5 per cent inside your RRSP, your after-tax return will actually be less because you'll have to withdraw the earnings and pay tax before you can spend those dollars, and the return isn't likely guaranteed.
Paying down other high-interest debt, such as credit cards, can also be a great idea.
2. Contribute to a TFSA.
Contributing to a tax-free savings account could be a better idea for those who have lower incomes today than expected in the future; younger people may be a good example of this.
How so? If you expect a higher marginal-tax rate in the future when making withdrawals from a registered plan, then withdrawing from an RRSP can be expensive at that time since you'll face tax on withdrawals.
You won't get a deduction for contributions to a TFSA as you will with an RRSP, but if you're in a low tax bracket today then you may not be giving up much in tax savings by forgoing a deduction today.
3. Contribute to an RESP.
Let's not forget about the Canada Education Savings Grants (CESGs) that are available from the government if you contribute to a registered education savings plan for a child.
The CESG awarded is typically 20 per cent on the first $2,500 you contribute to an RESP in a given year for an eligible child, to a maximum of $7,200 in CESGs in a child's lifetime. You won't receive a tax deduction for contributions to an RESP, but the funds will grow tax-sheltered inside the plan. Your child, and not you, will face tax on the CESGs and income earned in the RESP later, when withdrawals are made.
4. Contribute to a RDSP.
If you have a child or family member with a disability, contributing to a registered disability savings plan can be a good idea to create long-term savings for them. You can contribute any amount, at any time, up to a lifetime contribution limit of $200,000.
In fact, anyone can contribute to an RDSP with written permission from the RDSP holder. Similar to RESPs, there are grants available from the government (the Canada Disability Savings Grant – CDSG) which max out at $3,500 each year and a limit of $70,000 in grants over the lifetime of the disabled person. Grants can be paid until the end of the year in which the beneficiary turns 49.
5. Buy life insurance.
There are many different reasons why life insurance can be an effective financial tool. It can be used to shelter investment growth from tax, provide support to dependants if you're not around any longer, provide stable returns on investment, equalize an estate so heirs are treated fairly, create tax savings for shareholders looking to get money out of their corporations, make larger gifts to charity, transfer assets to future generations tax-free, cover taxes at the time of death, and more. Before investing in insurance, it's important to understand your purpose for it. This will allow you to then decide how much insurance is appropriate, and which type is best (permanent, or temporary – known as term insurance).
Tim Cestnick is president of WaterStreet Family Offices, and author of several tax and personal finance books.