Strategies and Mistakes Some People Make When Investing in RRSPs
The Home Buyers Plan (HBP) - Because an RRSP is a tax deferral vehicle, you can use it for deferring income now, and later for things other than retirement.
Although this will reduce the amount of money you have at retirement, you can use it to subsidize your income in years that you have a lower income or may have lost your job.
You can also use your RRSP money to purchase a home.
The HBP allows firsttime homebuyers to withdraw up to $20,000 TAX-FREE from their RRSPs as long as they pay it back in instalments over the next 15 years.
If you are a couple, you can withdraw $20,000 from each of your RRSPs, which will give you $40,000 as your down payment for your home.
The Lifelong Learning Plan (LLP) - This allows you to access funds from your RRSP to help pay for your own, or your spouse's education.
Under the LLP you have the right to withdraw up to $10,000 per year without paying tax, to a maximum of $20,000 over a four year period.
Then, to avoid having to pay tax on the money you used for education, you must repay the money back into your RRSP over a 10 year period starting after the fifth year.
RRSP or TFSA? - If you have the money to make a contribution, but don't want to claim the RRSP deduction in the current year, as your income is already low enough, you can carry forward your deduction to future years when you need it.
Alternatively, if you know you will want to withdraw the funds, but would like to shelter the growth of your investments until the time you need them, then contribute to your TFSA.
Both programs allow tax sheltered growth.
The benefit of the TFSA is that you don't have to declare the growth on your investment as taxable income.
Contribute as early in the year as possible - If you contribute at the start of the year, all of the income earned on your contribution will accumulate tax-sheltered for the rest of the year.
The effect of early contributions over a few years will be incredible.
If you've always made your contribution just before the deadline, consider making both a contribution for the current year and next year at the same time.
Then continue as usual, making your contributions at the "deadline" - only then you'll always be one year ahead.
Although this will reduce the amount of money you have at retirement, you can use it to subsidize your income in years that you have a lower income or may have lost your job.
You can also use your RRSP money to purchase a home.
The HBP allows firsttime homebuyers to withdraw up to $20,000 TAX-FREE from their RRSPs as long as they pay it back in instalments over the next 15 years.
If you are a couple, you can withdraw $20,000 from each of your RRSPs, which will give you $40,000 as your down payment for your home.
The Lifelong Learning Plan (LLP) - This allows you to access funds from your RRSP to help pay for your own, or your spouse's education.
Under the LLP you have the right to withdraw up to $10,000 per year without paying tax, to a maximum of $20,000 over a four year period.
Then, to avoid having to pay tax on the money you used for education, you must repay the money back into your RRSP over a 10 year period starting after the fifth year.
RRSP or TFSA? - If you have the money to make a contribution, but don't want to claim the RRSP deduction in the current year, as your income is already low enough, you can carry forward your deduction to future years when you need it.
Alternatively, if you know you will want to withdraw the funds, but would like to shelter the growth of your investments until the time you need them, then contribute to your TFSA.
Both programs allow tax sheltered growth.
The benefit of the TFSA is that you don't have to declare the growth on your investment as taxable income.
Contribute as early in the year as possible - If you contribute at the start of the year, all of the income earned on your contribution will accumulate tax-sheltered for the rest of the year.
The effect of early contributions over a few years will be incredible.
If you've always made your contribution just before the deadline, consider making both a contribution for the current year and next year at the same time.
Then continue as usual, making your contributions at the "deadline" - only then you'll always be one year ahead.