Do you know what you have in your RRSP? I don’t mean how much money; I mean what kinds of investments. If you answered “guaranteed investment certificates” or “cash savings account,” welcome to the very large club! If so, you’re missing out on a huge opportunity to increase your wealth way beyond the paltry returns that GICs and savings accounts offer. That’s because your RRSP contributions can be invested in a vast array of assets beyond your basic “no-risk/small return” vehicles.
Before you make that investment decision, though, make sure you open up an RRSP. Basically, you can contribute 18% of “earned income” to an RRSP every year to a pre-set maximum. For 2013, the maximum contribution limit was set at $23,820. If you can’t contribute your maximum in a year, contribute as much as you can.
Make monthly contributions, and start now! The sooner you start tax-sheltered compounding in your RRSP, the better. Start off with small amounts, gradually increasing as your salary rises. Remember the magic of compounding. Even a $500 monthly investment compounded monthly at a relatively conservative rate of 6% will grow to $500,000 in 30 years.
You can also increase your contribution in a given year by using “contribution room” you’ve carried forward from previous years (that contribution you didn’t make for 2012, for example). And you should also reinvest your tax refund. It’s found money. Use it to increase your nest-egg to a million or more.
Here’s a quick list of what the Canada Revenue Agency says are qualified RRSP investments. For more detail, check the CRA website.
Bonds. Federal, provincial, municipal government bonds are eligible. Bonds of publicly-traded companies are also qualified investments.
Exchange-listed securities. This encompasses common and preferred shares, exchange-traded funds, closed-end funds and other securities that are traded on designated stock exchanges in Canada or other countries. This also includes limited partnership units and royalty units. Canadian and U.S. stock exchanges are listed as designated exchanges. However, “over-the-counter” trading systems are not eligible.
Exchange-traded funds (ETFs). ETFs traded on designated stock exchanges are qualified RRSP investments.
Mutual funds. Canadian mutual funds are eligible – and there are thousands of these to choose from.
Options. Covered put and call options on qualified stocks are eligible as RRSP investments. Note, though, that I wouldn’t recommend options for everyone. These are specialized types of investment products, and can be quite risky if you don’t know exactly what you’re doing.
Money or cash deposits (including foreign currencies under certain circumstances).
GICs. Guaranteed Investment Certificates are, of course, qualified RRSP investments.
Other. Annuities, mortgages, certain shares of small business corporations and venture capital corporations can be put in an RRSP. You may also put money into investment grade gold and silver bullion, coins, and certificates. But again, I wouldn’t recommend rushing out and putting your RRSP retirement fund into precious metals or venture capital corporations, for example, without some pretty heavy-duty advice from a qualified adviser.
Know yourself and invest wisely
For many of us, an RRSP is our only source of retirement income apart from the Canada Pension Plan. And while you can invest in just about every type of asset class, an RRSP not the place to speculate on junior mines, high-tech start-ups, commodities, or other risky and volatile assets. Remember, tax benefits like the dividend tax credit, the capital gains tax exemption, and the ability to offset losses against gains are lost within an RRSP.
Aside from not contributing to an RRSP at all, the RRSP investment choice is where most people go astray. Most of us tend to overestimate our capacity to deal with market volatility and take investment losses. So be realistic about your own tolerance for risk (and ignore what your neighbor, uncle, or barber thinks – they generally exaggerate!). Work with a objective financial planner to allocate your RRSP assets according to a plan determined by your personal goals and a realistic assessment of your tolerance for risk.
Then go for it, and put something other than boring old cash in your RRSP! – Robyn
Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at firstname.lastname@example.org for a confidential planning consultation.
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