Maximizing an RRSP: Tips to Boost Retirement Savings

A registered retirement savings plan (RRSP) is a tax-advantaged savings tool designed to help Canadians achieve a comfortable retirement. Canadian residents under 71 with some earned income can open an RRSP at participating banks, credit unions, trusts, and insurance companies. They may also receive access to an RRSP as a benefit from their employers.

RRSP contributions grow tax-free until withdrawal, allowing savings to compound. By adopting certain tactics early on, account holders can boost their retirement savings and set themselves up for future financial security.

Start saving early

It’s never too early to begin saving for retirement. Canadian residents can open an RRSP as soon as they start earning income and filing taxes. It’s often a good idea to open an RRSP account as quickly as possible, even if one can only make minimal contributions. The earlier a person begins saving, the sooner their contributions can begin tax-deferred growth.

Make a habit of contributing

Some RRSP holders may wait until the end of the year to make their annual contributions. However, this approach limits growth because it reduces the time that money has to compound. Contributing at the beginning of the year is more advantageous but may be difficult in some financial circumstances.

Regular monthly contributions are a good compromise that can make saving easier. Many people invest pre-tax funds directly from their pay cheques or automate monthly deposits. Account holders can adjust their contributions to accommodate changes in income, expenses, or other savings goals.

Reinvest tax refunds

RRSP contributions are tax-deductible, which means they can reduce a person’s income taxes and help them earn a more significant tax refund. Spending that refund on a vacation, fancy dinner, or shopping spree may be tempting. While reinvesting that money into one’s RRSP may not be quite as glamorous right away, this approach can help secure a more comfortable retirement in the long term.

Consider a spousal RRSP

Eligible Canadian residents may choose one of three RRSP types: an individual RRSP, which one person sets up, contributes to, and benefits from; a group RRSP, which employers may offer and match as part of their benefits package; and a spousal RRSP. A spousal RRSP allows both halves of a married couple (or common-law partners) to receive tax benefits and split retirement income. The partner who makes more money can contribute in the other partner’s name and earn the tax deduction. This option allows both partners to work together and plan for retirement. It may be a particularly good fit if one spouse or partner has a significantly higher income than the other.

Plan carefully for withdrawal

An RRSP can only remain active until the account holder turns 71. They have to close their account by the end of the calendar year of their 71^st birthday. It’s important to have a withdrawal plan so the deadline doesn’t catch anyone by surprise. Options include:

• Request a lump sum payout. RRSP holders can withdraw their funds at any time. However, the total amount withdrawn counts toward taxable income for the year.
• Establish a registered retirement income fund (RRIF). An RRIF provides Canadian retirees with income from their savings. Typically, retirees must withdraw a set minimum from their RRIF each year.
• Purchase an annuity. An annuity from a trusted financial institution can help an individual put funds aside for long-term care and other future expenses.

Approaches to retirement savings may change throughout a person’s lifetime as their financial situation, family, and goals shift. Fortunately, an RRSP is a flexible tool. A trusted financial advisor may help those who are unsure about their next steps develop the right retirement savings strategy for the current chapter of their lives.

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