Registered Retirement Savings Plan Limits and Strategies

RRSPs are a savings trust account that is registered with the Canada Revenue Agency as a vehicle to be used for securing some of the financial needs of retirement. No one is obligated to participate in a Registered Retirement Savings Plan but, as an incentive to do so, the Canada Revenue Agency offers very attractive income tax advantages to those income earners who do. There are some legal restrictions and guidelines which must be adhered to and numerous investment options such as stocks, bonds, Guaranteed Investment Certificates, mutual funds and equity backed mortgage funds that qualify for use. RRSPs are a remarkable investment and strategic tax tool. Two main tax advantages are that participants can deduct contributions from current income in order to pay less income tax, and any future growth these investments make are allowed to compound at an accelerated rate because they grow unaffected by income tax, dividend taxes and capital gains tax.


Even with all the obvious advantages, estimates show Canadians as a whole, have contributed only 7% of the allowable amount.


Understanding some investment strategy basics will help you organize and take control of your financial life. Most Canadians know what they would like their retirement picture to look like but are not doing enough to determine how they are going to get there. Establishing your goals, understanding concepts like asset allocation, diversification, dollar cost averaging, and compounding, will enable you to approach your investments with a strategy. Getting an RRSP rolling is logically the best place to start.


Generally, the amount you are allowed to contribute to your own, spouse’s or common-law-partner’s RRSP and claim the equivalent tax credit, is determined by the deduction limit indicated on your latest Notice of Assessment, Notice of Reassessment or form T1028. This amount has been calculated for you by the Canada Revenue Agency based upon information gathered from your previous year’s return. The qualified contribution limits are established using certain guidelines. For the 2006 tax year, the maximum contribution is set at the lesser of $18,000 or 18% of earned income. For 2007, that will change to the lesser of $19,000 or 18% of earned income, followed in subsequent years by a plan to index the maximum figure to increases in the average industrial wage (using $19,000 as the base amount), or 18% of earned income.


Whenever, wherever and however possible, it behooves everyone to put the maximum amount of money away for their future. Unfortunately, too many Canadians are just getting by in the battle to survive for today. These Canadians, more than anyone, need to be sure what ever amount they can invest is well protected now and after they retire. Even at retirement everyone wants their nest egg to continue to grow and, at the same time, they need for their capital to be well protected.


Understanding diversification. Balance between risk and return is just another way of saying diversification. Your RRSP has to have it. Grandmother always put it more clearly when she reminded to never put all your eggs into one basket.


All investments fall into three categories:


1) Cash equivalents such as government savings bonds, treasury bills, and money market mutual funds, all of which are readily liquidated, are safe and secure, but pay a lower rate of return.


2) Fixed income such as long term GICs, mortgages, bonds, and mutual funds which invest in income generating securities.


3) Growth such as stocks and mutual funds which invest in stocks. Going through each category, the possibility for higher returns increases from numbers 1 to 3 but so does volatility.


Investing with diversification requires a mix of the three investment categories that will attempt to seek the greatest return without overstepping the level of security an investor’s proximity to retirement age or investment personality (usually referred to as risk tolerance) will require. Generally, the closer to retirement age, the more secure the investment portfolio should be. With so many mutual funds on the market, one or several will be an exact fit to meet of your retirement strategy investment requirements.


As to precisely what RRSP investment to choose, you are usually best to consult an investment advisor.