November 21, 2005: Most Canadians will depend on their Registered Retirement Savings Plans (RRSPs) to provide necessary financial support for their retirement years. The quality of that support ? in other words, the amount of income you?ll have to live your retirement dreams ? depends on taking action right now to make the most of the tax-saving and income-building advantages your RRSP offers. But you could be shortchanging your retirement years and paying more taxes than you need to this year by failing to do one simple thing: making your maximum RRSP contribution.
For the 2003 tax year*:
· 5.9 million Canadians contributed a total of $27.6 billion to their RRSPs
· This represents just 9 per cent of the total contribution room available
· 78 per cent of Canadian taxpayers have unused contribution room in their RRSPs
· The total amount of unused contribution room is $342 billion ? or $15,545 for every taxpaying Canadian.
Sure, the tax-filing deadline is months away, but now is the time to begin mapping out a strategy ? perhaps including a loan ? to take full advantage of your RRSP contribution room. Start by checking the Notice of Assessment you received from the Canada Revenue Agency after filing your tax return last year to find out exactly how much contribution room you have ? and make plans to fill it up as quickly as possible because:
· Contributing to your RRSP can increase the size of your refund. Plus, the money you?ve contributed will have the potential to grow inside your tax-deferred plan ? and that can add up to a very significant amount.
Here?s an example: Suppose your 2005 RRSP contribution limit is $3,000. Depending on your tax bracket, that could generate nearly $1,500 in immediate tax savings while adding to the tax-sheltered nest egg growing in your RRSP. In fact, over 30 years at an annual compound rate of 8 per cent, your one-time $3,000 contribution will be worth $30,188 on a pre tax basis!**
·There?s absolutely no doubt that your most effective RRSP strategy is to maximize your contributions every year and here?s the good news: you can always catch up for years past when you were unable to make your maximum contribution. The government allows you to accumulate and carry forward all your unused contribution room from previous years (since 1991). And, the sooner you make up for lost time, the better ? because you?ll have more money growing faster inside your tax-sheltered RRSP.
Financial institutions often offer RRSP loans at the prime rate or lower ? so borrowing to ramp up your 2005 contribution can make good sense. Say you borrow $10,000 for one year at 5 per cent and make monthly payments of $856 to pay off your loan over 12 months. If your marginal tax rate is 40 per cent, your $10,000 deduction will generate $4,000 in immediate tax savings. And over 30 years (at an 8 per cent rate of return) your extra $10,000 RRSP contribution will grow to $100,600 on a pre tax basis**. All this for a total interest cost of just $273 for your catch up RRSP loan!
But, borrowing only works if you intend to pay off the loan quickly ? stretching it out increases the amount of interest you?ll pay on the loan and reduces or eliminates its effectiveness. The best strategy is to use your increased tax refund to repay the loan even faster.
If borrowing to invest in your RRSP is right for you, the time to map out your strategy is now. Your financial planner can help you decide if an RRSP loan can work for you ? and, if so, how to get the maximum benefit from it.
* Statistics Canada as quoted in the Toronto Star, January 25, 2005.
** The rate of return is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values or returns on investment.
This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.