It’s tax time, and it’s likely that your Registered Retirement Savings Plan (RRSP) has come up time and again. Whether you’ve contributed or not, you’ll immediately receive a Notice of Assessment (NOA) from the Canada Revenue Agency (CRA). This will give you the maximum you’re allowed to contribute for the next year.
And honestly, I’d get started as soon as you can. Ideally using your tax refund. And once you do get started, there are simple strategies you can start using right away to unlock even more hidden value from your RRSP. Ones you may not have already come across. So let’s get into it.
Spousal contributions and income splitting
First, let’s assume you have a spouse. In this case, spousal RRSP contributions are an excellent way to unlock value. This involves contributing to an RRSP in your spouse’s name, providing you with some income splitting.
By doing this, you’re spreading your retirement income across both your and your spouse’s names. And this certainly has some big advantages. If one spouse is in a higher tax bracket than the other, you’re immediately bringing down your net income by contributing to an RRSP.
Furthermore, when retirement hits, withdrawals from the spousal RRSP can be split more evenly. This can create a lower overall tax paid on withdrawals as well! All together, you and your spouse win from this method of RRSP contribution both now and in the future.
Employer matching programs
Another option is to ask your employer if they offer a group RRSP plan as part of their benefits package. Some plans include employer matching contributions, whereby your employer will match a portion of your RRSP contributions to a certain limit.
This matching allows you to bring in essentially free money from your employer, boosting your retirement savings. It also certainly provides you with motivation to continue contributing to your RRSP on a consistent basis. Especially as you’ll want to receive the full employer match.
This not only will increase your retirement savings, but will also provide an immediate return on your investment through the employer match. Furthermore, a group RRSP can lower your taxable income as well, as contributions bring down your taxable income each year.
Lifelong Learning Plan
Another method of unlocking hidden value from your RRSP is taking advantage of the Lifelong Learning Plan (LLP). This can help you by allowing you to withdraw funds from your RRSP tax free, giving you up to $10,000 per year for a total of $20,000. These funds would then be used to finance full-time training or education not only for you, but also could be used for your spouse.
While this is typically used for educational purposes, it can be leveraged strategically to advance your career. Use that money and you can invest in your education and skills to earn a higher income in the future.
Putting it to work
If you’re making more, being taxed less, and putting more aside in your RRSP, remember to invest it! An easy option is to put your refund aside each year into an index fund. One I like is the Vanguard FTSE Global All Cap ex Canada Index ETF (TSX:VXC). This exchange-traded fund (ETF) provides growth from investing in all market caps around the world.
The ETF currently offers a 1.58% dividend yield, with shares already up almost 10% year to date as of writing. It provides you with a diverse range of exposure to both developed and emerging countries, as well as sectors and industries around the world.
So put your RRSP to work. Not just for your future, but for immediate income as well.
