Ten RSP Mistakes Not To Make!
The most common mistakes every investor should avoid.
1. Don't make contributing to your RSP a once-per-year event!
For too many people, contributing to one's RSP happens once per year, usually on the last day of RSP season. According to "The Daily" from Statistics Canada, 29% of all taxfilers contributed in 1999, or 36% of those eligible to contribute. A record 6,207,000
taxfilers contributed an average contribution amount of $4,477, after inflation was taken into account. The largest group of RSP contributors were those from ages 35 to 44 years of age. Start a regular contribution plan for your RSP and you will see two benefits; you will avoid the February rush, and most importantly, your money will begin working sooner for you.
2. Don't feel restricted by foreign content limits.
Most Canadians are aware of the 30% foreign content restriction (as of January 1, 2001) for their RSP, but many are not aware of how to maximize foreign content within this regulation. Some foreign funds remain 100% RSP eligible by investing in Canadian money market securities. Through the use of futures and forward contracts, these funds seek to generate a return similar to that of the underlying index or mutual fund. For example, an international RSP Index Fund seeks to generate a return similar to that of international equity markets (excluding North America), giving investors a well-diversified international portfolio of companies outside North America. Invest in Canadian mutual funds with high foreign content. Canadian mutual funds are permitted to invest 30% of book value in foreign investments but are still considered to be Canadian content in your RSP. By investing in a Canadian mutual fund that has a high level of foreign content - close to 30% -you can increase your exposure to foreign markets. For example, your 30% allowable foreign content + 30% of the 70% Canadian mutual funds (which is 21%) = 51%.
3. Don't let your tax refund go to waste.
Your lump-sum RSP refund is a great opportunity to save. Rather than spending your tax refund, consider repaying your loans and credit cards, paying down your mortgage, or if you have the RSP room, "top" up your contribution.
4. Don't forget about your long-term financial plan.
While the idea of financial planning can seem like a mystery, it shouldn't be. Without a financial plan, you won't know how much you need to save, for how long, or how to invest in your RSP. For most Canadians, retirement planning is a major goal that requires considerable financial commitment. By establishing a plan and monitoring your progress on an ongoing basis, you will reach your RSP goals.
5. Don't forget to maximize your RSP contributions.
Contributions to an RSP are deductible for a year if they are contributed within that year or within 60 days after the end of that year. Three factors that limit the amount you can contribute to an RSP are: a dollar limit, which is $13,500 for 2001; a percentage (18%) of your previous year's earned income; and any pension adjustment. If you contribute less than your allowable maximum amount, you can "carry forward" the extra deduction room and make a contribution the following year. Remember though, the dramatic effect of compounding, and remember too, that while your funds are held in the RSP, they are not subject to tax.
6. Don't forget to diversify your portfolio.
Studies have shown that more than 80% of your portfolio return is the result of asset allocation and not individual investment selection. Research shows that different asset classes will outperform others at any given time. Ensuring your investments are allocated across all asset classes (safety, income and growth) will ensure that you always have the best performing asset class in your portfolio.
7. Don't forget to designate a beneficiary for your RSP.
Despite the fact that RSPs make up the bulk of many people's assets, a good many still do not designate a beneficiary or take into account the tax consequences when they do name a beneficiary. Under the Income Tax Act, upon death, the assets in an RSP can be automatically transferred tax-free to your spouse's plan, avoiding probate fees and income taxes.
8. Don't forget to think about how you and your spouse's income will be taxed at retirement.
Spousal RSPs can provide a means of income splitting for couples; they can help defer taxes right away, and reduce taxes at retirement. By shifting the income or capital gains from a higher-income earner to the lower-income earner, the same amount of income is taxed at a lower rate (or not at all if the lower earner's income is low enough). Income splitting can substantially reduce your household's total income tax payable. A taxpayer may choose to contribute to their own personal RSP or to an RSP in their spouse's name while claiming the contribution as a tax deduction on their own tax return. However, the total contributions by the taxpayer may not exceed their personal RSP deduction limit. For example; John earns $50,000 per year. Based on the current contribution limit of 18% of previous year's earned income, John may contribute $9,000 to an RSP. He may contribute the whole amount to his personal RSP, or $9,000 to a Spousal RSP or a portion to each RSP, as long as the total amount contributed does not exceed $9,000 (assuming no carry-forward of unused contributions or over-contributions and no pension adjustments).
9. Don't "park" your RSP contribution indefinitely.
Every year, many Canadians "park" their RSP contributions in money-market funds. If we left our RSP contribution decisions to the last possible minute, many of us did not take the time to make a well-researched investment decision before the deadline. As a result, our investment sits all too often in a money market fund, when it could be potentially growing and generating a better return. If this sounds like you, take the time this month to visit with your Financial Advisor and re-allocate your investment within your RSP.
10. Don't miss an RSP contribution just because you are temporarily short of funds.
Many people find themselves short of cash at RSP season, and many simply give up on contributing all together. Borrowing the money may be the answer. RSP loans are usually offered at attractive rates, making them favorable against other personal loans, and often they are attractively structured allowing you to defer principal payments for a few months. This option allows you to use your tax refund to repay the bulk of the loan.
This list, while by no means complete, is a good annual update and review. If you find yourself making any of these mistakes and would like to start planning ahead for next year, contact your Financial Advisor.
P.S. I also have the following excellent articles. If you want a copy, please call Ping Lee at 473-4928.
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- 2001 Federal Budget Analysis and Tax Planning for 2002
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