The RRSP season is upon us! Every bank, every bank branch and every teller will remind you to contribute to your RRSP before the deadline [RRSP deadline for tax year 2012 is March 1st, 2013 and your RRSP contribution limit is the lower of 18% of your earned income or $23,820 minus your Pension Adjustment (PA) and plus any past years’ unused contribution room.]. If you have a financial advisor, they have probably already contacted about your RRSP contribution. With so many people vying for your RRSP contributions, who should you trust?
What is an RRSP:
A quick refresher of what RRSP is. Registered Retirement Savings Plan (RRSP) was introduced by the government to encourage Canadians to save for their retirement. The contributions are tax deductible, the amount you contribute to your RRSP account can be deducted from your income, and the growth is tax deferred, you will pay taxes when you withdraw at retirement. Your RRSP does not have to be just in a savings account or a GIC; you can hold a wide variety of investments in your RRSP account such as stocks, bonds, mutual funds etc. Read this article if you need more info on understanding RRSP.
You can normally make contributions throughout the whole year, however most people delay it until the RRSP season, which is the first sixty days of the New Year. Any contribution you make up to that point can be deducted from the previous year’s income. RRSP deadline for tax year 2012 is March 1st, 2013.
You have many options with your RRSP contributions let’s look at a few of them:
Banks: You can contribute to your RRSP through your bank; this can be done through the teller if you purchasing GIC or a savings account, but can also be done through your bank’s Advisors or Personal Bankers. These contributions will usually be deposited in in-house mutual funds; banks will not be able to offer you a wide variety of investment options unless you work with the brokerage arm of the bank (TD Waterhouse, BMO Investor line etc).
Broker: If you already have a broker then you have probably already been approached for RRSP contributions. Usually brokers will be able to offer you a wide variety of options. However, most brokers will recommend expensive mutual funds or packaged products. If you are a novice investor with small portfolio then you may consider mutual funds for the time being, however keep in mind they come at a fairly high cost. Indexing with ETF or Mutual Fund?
Discount Brokers & DIY: There is no need to pay high fees to other’s to manage your money, just follow these 10 tips for successful investing and you’ll be fine. You can also open a Discount Brokerage account (see 5 Tips to Choose the Best Discount Broker and Discount Brokerage For RRSP) and do your own investing by purchasing index funds and ETFs. This can potentially save you thousands of dollars in management fees and improve your returns.
TIP: Do not wait till the deadline every year to make contributions to your RRSP, set up a regular plan and contribute on regular bases. Speak with your Payroll or HR department to get the tax deductions from your paycheck.