Envision Financial

Simple RRSP tips

Simple tips to navigate the RRSP season and emerge on top

During February, RRSP countdowns dominate the walls of financial institutions and advertising space everywhere, reminding us all about the pitfalls of failing to save early and often, or for some, serving as a warning about how woefully underprepared for retirement we really are.

But are RRSPs really the best option for everyone or could that money be best placed elsewhere?

According to Envision Financial expert Brenda Bartleman, there isn’t a one size fits all approach when it comes to finances. When considering whether or not to contribute to RRSPs, it’s best to first think through a number of important questions, she advises. These include taking into consideration your marginal tax rate, your long and short term goals, the length of time you have until retirement and your risk tolerance.

”RRSPs are best used as a tax sheltering and tax deferral tool and making contributions during your low income years means a smaller tax break,” says Bartleman, a personal account manager. “Someone who’s just starting off in their career and isn’t making a lot of money may want to look at options outside of RRSPs. “

Let’s say you’re making $35,000 in taxable income, for example. Your marginal tax rate will be about 20 per cent—which means you’ll get 20 per cent of your RRSP contributions back after filing your taxes. Wait until your earning $49,000 in taxable income, and the amount you’ll be getting back from any RRSP contributions jumps to nearly 30 per cent.

“When you’re earning less, it would probably make more sense to put your money into a TFSA where you can still access the money and won’t be taxed on any earnings,” suggests Bartleman. “If you’re starting to make more money and are looking for some tax relief, that’s the time to start thinking about RRSPs. For people in higher income brackets, contributing to RRSPs is a very effective tax deferral strategy.”

For those who are contributing to RRSPs, it’s important to consider what to do with the tax return. Many view their tax return as extra spending money or “free” money, but Bartleman advises her clients to use money they get back to help them get ahead financially.

“Why not take that money and make a lump sum payment on your mortgage? You’ll be saving a lot in interest costs and be mortgage free sooner,” says Bartleman. “Another option is to use your tax return to make an early RRSP contribution for the following year.”

Bartleman also stresses the importance of taking the time to sit down with an investment professional and make a financial plan. A recent study found that only 59 per cent of Canadians have a financial plan and 82 per cent of those with a financial plan said having a plan helped them achieve their financial goals and 69 per cent with a plan said that they wish they had created one sooner.

“Many financial institutions offer this service at no charge,” says Bartleman. “It’s a great way to get an overall picture of your financial health so you can make wise financial decisions to help you get ahead and reach your financial goals.”


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