With the RRSP deadline looming next week, So many of us are trying to figure out what we should be doing in regard to our RRSP contributions. The deadline is just a week away.
Are you wondering should I contribute? Does an RRSP need to be part of my plan? Should you be scrambling to get a contribution in?
Who should be contributing?
For low income earners (those under $35,000 per year) you should think of a TSFA first. Did you know most Canadians still don’t have one and few cap it out? It is really the first step when it comes to long term savings.
As well, if you are a low income earner having an RRSP can work to your detriment in retirement. If your income has been low enough in your life that you qualify for the Guaranteed Income Supplement then you do not need to worry about RRSP contributions and your best saving tool is the TFSA.
Are you in consumer debt? If you are before you put money into retirement accounts and the like get rid of any credit card debt. Once the credit card debt is gone then add to your savings, TFSA and RRSPs. My only cavet to this is you will want to have an emergency fund in place.
When should I start contributing to an RRSP?
If you are earning over $35,000 a year then you want to start with a retirement plan as early as you can. Remember the laws of compound interest and make them work for you. Often when we are younger we have less responsibilities making it possible to save more. Even if you can’t contribute later those early funds over time can make a huge difference to your retirement nest egg.
Do you know why timing matters?
Everyone every year is given a maximum contribution you are allowed to contribute. Just because you are given a figure doesn’t mean you need to contribute that amount. For you, it might not make sense. Take a look at your numbers and decide if doing so benefits you, it might not. If it doesn’t wait to contribute as you can carry amounts over.
Why is it important to shop around?
Everyone has their favorite bank or lending institution, the fact is they may not have what you need or want. Your local bank only has a set number of financial products and a limited number of GICs and mutual funds. Once your RRSP balance is growing you may want to seek the advice of a financial planner and decide to go with a self directed RRSP. The self directed RRSP gives you more options. You decide which mutual funds, stocks and bonds are in your best interest.
Should you Automate?
One of the best things you can do is think about your RRSP contribution long before the deadline looms. Why would you want the worry of coming up with funds in time for the deadline? By automating savings you don’t even really miss it.
Should you borrow to invest in an RRSP?
If you are thinking about borrowing to invest in an RRSP so you can get a tax break that year, be careful. If you are already carrying consumer debt or your tax bracket is not high enough in may make no sense for you to borrow. You will also want to consider how fast any loan can be paid back, the interest rate and your taxable income. My personal thinking on this, if you don’t have the funds ready to contribute set up an automatic payment for the future. Contribute the amount of what would of been a loan payment. You are now beginning to contribute and paying no interest rate.
There are many things to think about as the deadline looms that is why tomorrow night for the #CDNmoney chat we are talking about RRSPs. Please join me at Tuesday February 23rd, 7pm EST on Twitter for a great conversation.