As we come closer to the end of the year, many people are considering their tax planning options. Most people are familiar with the Registered Retirement Savings Plan (RRSP) and how beneficial they can be under the right circumstances. However, there are many misconceptions as to how they can be used as a retirement savings tool.
Here are five things to think about when considering RRSP contributions and investments.
The Long Term
Purchasing RRSPs should be looked at as a long-term decision focused on retirement. The initial motivation to contribute to your RRSP is the relief it provides on current income taxes in the form of tax deferrals. What many often do not consider are the other sources of income during retirement. Canadian Pension Plan (CPP), Old Age Security (OAS), and supplemental pensions are sources of retirement income that, when combined, can place you in a higher tax bracket than during your working years. Taxes are increased and OAS can be clawed back. Working with an advisor who analyzes tax treatment during retirement can aid in deciding if (and when) to contribute to your RRSPs.
RRSP Season
When one looks at the huge volume of investments during the RRSP season, it is hard not to think about how much stock prices may be bid up during that time. Something to consider, especially with the year-to-date performance of the markets, would be making your annual RRSP investment now, while markets are down. Naturally, there is no way to time the market, but markets are certainly discounted from where they were a year ago. If you are one of the many Canadians who have RRSP carry forward room but are unsure of what to claim this year, consider claiming some now and leaving some for the future.
Ready to RIFF?
This question is potentially the most concerning consideration of all. Investors who are heavily weighted in the public markets and were considering retirement in 2022 are forced to postpone their retirement. The portfolio one selects in their 30s and 40s is very different from what makes sense during retirement. Simply put, volatility is not your friend and can be absolutely devastating to a retirement portfolio. As retirement approaches, consider less volatile investments. They are out there, and in many cases, they are not publicly traded, have far less volatility, and are producing positive returns.
The Other Registered Account
Most people do not think about their TFSA in the same way they do their RRSP. Although it does not provide the initial tax benefits that an RRSP does, it does provide future tax-free income that can greatly outweigh any current-day tax relief. As of today, the cumulative TFSA room is $81,500. Investing that for the next 25 years in a tax-free environment and then eventually providing tax-free income can dramatically improve your bottom line.
An Investment of your Time
There's no question that investing in something is better than nothing, but it is also equally true that some decisions are better than others. Given the complexity of tax rates, multiple sources of income, and the value of money and time, considering a written financial plan is important to determine what is most efficient for you, now and in the future. An investment of your time could save you hundreds of thousands of dollars or more.
For further conversation on how these five RRSP considerations apply to your financial situation, please contact reception@taag.ca.
 | Colin Keddy Director of Family Office |
Published by TAAG Corporation
© 2022 TAAG Corporation
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