With this year’s RRSP season having come to an end, many Canadians will have to accept that they’ve missed their chance to contribute—again. A 2010 poll by Investors Group (the Investors Group RRSP Intentions Poll) showed that at least 30% of Canadians don’t have an RRSP, and the majority of those people say it’s because they don’t have enough money left after paying their bills to consider investing.
“Paying your bills and your debts is very important, but your mantra should be ‘pay myself first,’” says Murray Pituley, Director, Tax and Estate Planning with Investors Group.
With that in mind, Pituley shares four tips for freeing up money you already have to invest in your RRSPs.
1. Consolidate debt if you can
Pituley says that many people have a variety of debt. Getting a consolidation loan at a lower interest rate can free up money by reducing the amount of their loan payments. Depending on your priorities, using that extra money to contribute to your RRSP could work for you.
On the other hand, Pituley suggests that people in significant debt may have priorities that aren’t RRSPs. “Trying to pay off debt a little quicker might make more sense. Or maybe they’re in a position where they need life insurance. Maybe they would be better off building an emergency fund or contributing to a tax free savings account.” Only you can decide the best way to use the extra cash you’ve freed up.
2. Be tax smart
There are several components to being tax smart. First, says Pituley, “When you file your taxes, make sure you’re claiming all the credits, deductions and exemptions that are available to you. I find there are certain tax breaks that people historically don’t take advantage of. They’re either not aware of them or don’t realize they qualified.”
For example, Pituley points out that many people make a donation to a registered charity and don’t get a receipt. “They’ll say, ‘It’s only $20.’ Those receipts add up. If you get in the habit of getting a receipt whenever you make a charitable donation, it could save you a few dollars.” Which you can then use to invest in your RRSP.
The next step is to take a look at whether you get a tax refund every year. Instead of looking at your refund as “found money,” recognize it for what it is—an interest-free loan to the government. Take the necessary steps to reduce your tax withholdings at the source. Get some advice from your employer about filling out and submitting a new TD1 form, and make sure you review this form every year.
Pituley says, “If we could find a way to increase our cash flow by reducing our withholdings, we could start a regular investment program, such as contributing to an RRSP.” Still, if you already know that you’re receiving a refund for 2011, think about putting that refund into an RRSP.
Pituley says there’s one more thing that comes to mind when he talks about being tax smart. “At this time of the year, a lot of people will receive a year-end bonus.” If you’re getting a bonus, use it wisely. You can roll it straight into your RRSP and defer paying tax on it.
3. Tighten your belt
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Cutting back your spending may seem obvious, but it’s something many of us resist. “Some people will say, ‘If I cut out a coffee a day, I’ll save $3 a day. That’s not a big deal.’ There may be some truth to that, but if you buy a coffee 20 days per month and you save $3 a day, that adds up. If you find two or three ways to cut back, the amount you save will be much more significant,” says Pituley.
4. Pay yourself first
Once you’ve found some extra money to put into your RRSP, you can make sure it ends there by setting up automatic withdrawals from your bank account. “Have that money go directly into an investment account,” Pituley says.
If you don’t think you’ll do that, you can approach your employer about making direct contributions to your RRSP from your paycheque. This out-of-sight, out-of-mind approach works for many people. And if your employer agrees, it’s also a good way to reduce your tax withholdings. Pituley says, “Your employer can take that into consideration in calculating the tax withheld at the source without requesting permission from the CRA.”
Danielle is a freelance writer and editor who has been writing about personal finance and investing for the past 10 years. She has worked for a provincial securities regulator, a bond rating agency and a large Canadian publishing house.