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Your essential RRSP questions answered

Retirees-Retirement-Exercise

1) What is an RRSP?

Of course you know what an RRSP is—it’s that thing you’re putting money into to save for retirement, right? Beyond that, many people’s understanding of RRSPs is pretty fuzzy. A common misconception is that the RRSP is a type of investment like a mutual fund, but it’s not. It’s simply a saving or investing account with certain tax-saving characteristics. When your bank sells you an RRSP, all they’re selling you is a prepackaged investment—usually a collection of mutual funds or a wrap program—that happens to be in an RRSP or registered account. But you can also open an empty RRSP account at your bank or discount brokerage and put whatever investments you want in it. You can even hold several different RRSP accounts with different institutions. “It’s really a personal pension plan,” says Peter Volpé, senior vice-president of the Toronto wealth management firm Integra. “For those of us who don’t have a pension plan to fall back on, it’s our best opportunity to build our own pension.”


2) How much can I contribute to my RRSP this year?

Up to 18% of your income to a maximum of $24,270 for the 2014 tax year. For 2015, the maximum will be $24,930. But if you didn’t max out your contributions in previous years (and most people didn’t) you can probably put in much more. Check the notice of assessment form the government sent you after processing last year’s tax return. The amount you can contribute will appear on the form.

3) When is the contribution deadline?

March 2, 2015 is the deadline for contributing to an RRSP for the 2014 tax year.

4) What kind of investments should I hold in my RRSP?

“All the general principles of portfolio-building apply,” says Eric Kirzner, professor of finance at Toronto’s Rotman School of Management. “You still want to have a proper balance of safety, income and growth.”

A good place to start is a portfolio of mutual funds that delivers a 60/40 split between stocks and bonds. Exchange-traded funds (ETFs) that give you the same split are a better bet, as their low fees mean they have a greater potential for growth.

If you have enough money to build both a registered and non-registered portfolio, then investments such as bonds, GICs and high-interest savings accounts are best kept inside of an RRSP, because their interest income is taxed at a higher rate. Capital gains and dividends are taxed at a lower rate, so stocks can go outside your RRSP.

5) Should I change my RRSP investments as I get older?

Yes. As a general rule, the closer you are to retirement, the safer your portfolio should be. When you’re in your 20s, 30s and 40s, it’s fine to have up to 60% of your money in equities, because if the stock market tanks, there’s time to recover. But in your 50s and 60s, one bad year in the market can do serious harm.

One useful rule is to subtract your age from 100 and invest no more than the remainder in stocks. So if you’re 40, you can put 60% of your portfolio in stocks, but if you’re 60, you should have no more than 40% in stocks. There are several life-cycle funds on the market that will automatically do this for you.

Tina Di Vito, director of retirement strategies at BMO, also suggests that as you get closer to retirement you start building up a buffer. How much? Just calculate what annual retirement income you’ll need and multiply it by three. If you think you’ll need to withdraw $20,000 a year, then in the years before you retire, build up a $60,000 buffer in ultra-safe investments, such as money market funds or GICs.

For more on RRSPs, read MoneySense’s Extra! “The Ultimate Guide to RRSPs” available for download now in your app store and on Next Issue.

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