Financial planning is an art. It can be challenging to balance paying for immediate expenses while saving for the future. RRSPs are great ways to reduce your taxable income and build a retirement fund simultaneously. In a year, you can contribute up to 18% of your earned income towards your RRSP fund minus any applicable pension adjustment. Here are a few tips to help you maximize your RRSP savings.
The earlier your start saving, the larger your fund will be
You should start your RRSP as early as possible. This allows your savings to start returning interest faster. It is also better to contribute towards your RRSP on a monthly basis rather than waiting until the end of the year to contribute.
You could consider a loan
Many people choose to take out a loan to contribute to their RRSPs. This might seem silly, but may be quite beneficial. Making your RRSP contribution early with the help of a loan increases your savings. You can then partially pay the loan back with your tax refund.
Unused contributions can be carried forward
There may be many times when you cannot contribute to your contribution limit. In such events, do not worry. Unused contributions can be carried forward to the next year and the year after that and so on. This way, if you receive a large sum of money later, you can put it towards your RRSP without having to worry about exceeding the limit.
Contribute now, deduct later
Your contribution limits are based on your previous year’s income. So even if your income may drop one year, you may still be allowed to contribute a large amount. In such cases, you may be able to benefit from contributing now but claiming a deduction later, when your tax rates are higher. That way you can increase your tax savings.
You can contribute to your spouse’s RRSP
While your contributions are exempt from taxes while inside the plan, withdrawals from an RRSP account are not. To reduce the amount of tax you need to pay in retirement, you could consider contributing to a spousal RRSP if your spouse will have a lower retirement income. This results in two sources of income that are taxed at a relatively lower rate. In these cases though the savings are in your spouse’s name, you can claim deductions for your contributions. Remember, your contribution to a spousal RRSP does not affect their contribution limits, though it does reduce your own contribution room.
Build a diverse portfolio
RRSPs can hold a variety of investments such as GICs, bonds, stocks, mutual funds and segregated funds.
Don’t shy away from seeking professional advice when building your RRSP account. Investing your money blindly is never a good choice. Talk to people, financial agents and do your homework well before designing your portfolio.
This post contains sponsored links from Sun Life Financial.