Did you know that the 2016 Registered Retirement Savings Plan (RRSP) deadline is February 29th? Although 61% of Canadians plan on a making contribution (down from 64% compared to last year), there’s still a lot of confusion about the specifics of the program, according to BMO's sixth annual RRSP study.
Those who have already made a contribution this year have put aside an average of $3,984, while those planning to make a contribution say they plan on contributing an average of $3,327. This is an encouraging sign since both numbers are up slightly from last year, but understanding how your RRSP works is arguably just as important as saving for your retirement.
How to Contribute to an RRSP
To contribute to your RRSP, you need to open up an account first; this can be done at your financial institution, a discount brokerage, or even with a robo-advisor. The money you contribute to your RRSP can then be used to buy different investments. The act of actually contributing money into your RRSP is straightforward; you’re literally putting money into your account.
If you require some help with picking investments, talk to a financial advisor and have them explain to you why they’re recommending certain assets. Don’t forget that many employers offer some kind of RRSP matching program which is also a good way for you to get started.
When Contributions Must be Made
The formal contribution deadline is 60 days after the start of the New Year which falls on March 1st, or February 29th on leap years. This deadline only applies to contributions that you plan on using to make deductions on your previous year’s tax return. There’s no reason to stress out about this deadline since you can make contributions any time during the year.
The Amount One Can Contribute
Every person has a unique limit that’s based on how much you earned in the previous year. Your RRSP deduction limit is calculated at 18 per cent of your income from the previous year, but it can be lowered if you have a pension from your employer (known as a pension adjustment). Your deduction amount carries forward every year, so if you don’t max out your limit, you don’t need to worry about losing that contribution room. To find out your exact deduction limit, take a look at your last notice of assessment, or check your account on the CRA website.
Investments That Can Be Held Within an RRSP
Since your RRSP is an investment vehicle, you can fill it with just about any investment product, but the most common are as follows:
- Mutual Funds
- Exchange Traded Funds (ETFs)
- Guaranteed Income Certificates (GICs)
- Money market funds
- Individual stocks
Remember, depositing money into your RRSP is not enough; you need to purchase investments in order for your assets to grow. You need to find that balance between investing in equities and fixed income assets - this is known as your asset allocation. Again if you need assistance, be sure to speak to a financial advisor.
Understanding how your RRSP works can be a bit intimidating, but if doesn’t have to be. If you take the time to do just a little bit of research, you’ll realize that your RRSP when used effectively is a great way to help build your retirement portfolio.