RRSPs: How to get the most out of your money

There’s nothing like an RRSP contribution deadline to get people thinking, and perhaps worrying, about whether they will have enough money to enjoy a comfortable retirement.

This year’s deadline is midnight on March 2. But a recent CIBC poll found that as many as 50 per cent of Canadians don’t plan on making a contribution this year.

That’s a bad idea, say financial advisers, as RRSPs are one of the best ways to make your money grow into a sizeable nest egg for your golden years.

Here are the top five tips for making the most of your RRSP.

Start small

Saving money should be a regular part of your routine, even if you’re only contributing $100 per month.

“It’s not so much how much you’re putting aside, it’s the fact that you’re having the discipline to do it,” says CTV’s chief financial commentator Pattie Lovett-Reid. You can always raise your contribution amounts as your income increases.

Talbot Stevens, author of “The Smart Debt Coach,” says buying into the concept of paying yourself first “will get most people halfway to secure retirement.”

Don’t spend your refund

There’s no other savings tool that gives you a “turbo boost” in the form of a tax return like an RRSP, Alex Kenjeev, president of O’Leary Ventures, told CTV News Channel.

Depending on what tax bracket you’re in, you can expect a return of between 25 and 40 per cent, Kenjeev said. On an investment of $1,000, that’s between $200 and $400, he said.

“Name any other asset class that has that attribute,” Kenjeev said. “I invest money for a living and I can’t think of any.”

The key to making your RRSP grow so quickly, he said, is to re-invest that return.

“That’s why (an RRSP) compounds so quickly.”

Pay off your debt?

Students just out of school saddled with loan or credit card debt should consider paying off those debts before thinking about saving for retirement, Lovett-Reid says.

However, you can consider contributing to an RRSP if you can also pay off your debt within a short time-frame.

A good rule of thumb is to ask yourself if you will be able to pay off any debt within six months if you decide to make an RRSP contribution.

That seems counter-intuitive, Kenjeev acknowledged. However, because the costs of borrowing are so low these days, it still makes sense to save despite having debts.

“Put that money in your RRSP, take the refund you get from the government, put the refund toward your debt and promise yourself that you’ll pay off your debt within six months,” Kenjeev said. “You’ll usually be better off.”

Forget it’s there

While there’s often a debate about which is better, a Tax-Free Savings Account or an RRSP, a TFSA does not encourage the same discipline because you can withdraw money at any time without penalty.

Contributing pre-tax income to an RRSP is an incentive to leave it and let it grow and defer paying that tax.

“It encourages you to put your money away and forget about it until you need it down the road,” Kenjeev said.

View it as an ‘independence fund’

RRSPs aren’t just for retirement, Kenjeev says.

There may come a day when you lose your job or have a health crisis and the money in your RRSP will keep you afloat.

“Even if you don’t end up using it, you always know that if you lose your job, something goes wrong, the economy turns down or if you want to go start a business, that money’s there for you,” Kenjeev said.

Investors can also borrow from their RRSP without penalty to make a down payment on a home and have a set amount of time to repay that money without penalty.

Bonus tip: When a TFSA is tops

While a TFSA is an option when saving for a shorter-term goal, such as a trip or a down-payment on a home, there is an instance when the tax implications are actually better than an RRSP.

Low-income earners, people making $40,000 or less, should consider contributing to a TFSA.

“Yes, you won’t get a tax refund up front, but you won’t have to pay tax on the withdrawals either,” Stevens said.

Paying the tax up front when you’re in a lower income bracket will save you money later, as you may be needing the money when you’ve worked your way into a higher tax bracket.

Having an RRSP will compromise government benefits offered to low-income seniors,” Lovett-Reid said. However, having something tucked away in a TFSA will not.