It's The Most Wonderful Time of The Year
And no, the holidays did not come early this year. It’s RRSP season and the most exciting time of the year when you need to start preparing to file your taxes.
If you haven’t made a contribution towards your 2020 year yet, you only have until March 1 to do so. This date hasn’t really ever changed, so it always amazes me to see how many people are always scrambling in the last week to put money away into their RRSP’s. This is something that you can set up, and contribute to, at any time during the year. You don’t just have to wait until February when everyone starts marketing that the RRSP deadline is coming up.
If you don’t know what an RRSP is, let me tell you as simply as I can.
It’s a government-regulated account (registered) where any contribution that you make will give you an immediate tax deduction. Within your RRSP you can invest in things such as ETFs, stocks, bonds, mutual funds, real estate, etc.
Example: if your income at the end of 2020 was $75,000, and you contributed $10,000 into your RRSP throughout the 2020 year, then you are only being taxed as if you made $65,000 in 2020. This would bump you down into a lower tax bracket, and either provide you with a bigger tax refund, or would reduce the amount of taxes owed.
Keep in mind as well, that when you invest in a healthy and diversified portfolio within your RRSP, that your contributions grow tax-free until you start to withdraw them. And most people withdraw their RRSP when they need the income in retirement, so they’re typically in a lower tax bracket. You do eventually pay tax on your withdrawals, but if you’re retired and farting around the golf-course or sipping Pina Coladas on a beach somewhere, chances are you won’t be in a high tax bracket already, because most retirees don’t work. If you start young, build your portfolio up to $1,000,000, and only need $50,000 in retirement, then you’re only paying tax on your $50,000 withdrawals.
How Do I Get Started?
Well, to be honest, you should contribute to your RRSP throughout the year, but if you haven’t been contributing then you should do so before March 1. The contribution room that you have available to you can be found through your CRA My Account, or on your NOA from the previous year. Your accountant should also have that number somewhere. So don’t delay, start today.
Here are the three main ways that you can open an RRSP;
1. Managed: Personalized investment portfolios that are managed by advisors and professional money managers at financial institutions. Portfolios are tailored to the specific needs of the client depending on a number of factors such as your age, risk tolerance, and short and/or long-term goals. There are typically high fees associated with managed accounts since a human is deciding what securities to hold within that account and are actively managing it.
2. Robo-Advisor: A new class of financial advisors. It uses algorithms to provide investment management and advice with little human supervision. Using a certain type of software, a Robo-Advisor is able to automatically buy, sell, and rebalance assets in your portfolio. Don’t know the first thing about investing but want to invest in ETFs? Don’t you worry. Robo-advisors will do it all for you. So, if you’re new to investing, and want to reduce the fees you’re paying, then a Robo-Advisor may be a perfect fit for you.
3. Self-Directed: You have full control over the buying and selling of securities in your account. By managing your own account, you can reduce the amount of fees that you pay, putting more money in your pocket at the end of each year. With a self-directed account, you do all of the dividend re-investing and rebalancing of your portfolio.
We’ve helped 100’s of clients in our Financial Freedom Coaching program set up an RRSP and use it as an investment vehicle throughout the year. And we can help you too. If you’re ready to set up a Free Coaching Assessment call with our team to see if you’d be a good fit for our coaching program, then sign up here.
We can help you build a solid budget, set you up on a plan where you’re making weekly-monthly contributions into your RRSP, and save you from pulling your hair out every February as you scramble to find money to contribute.