RRSPs are the best single
investment any Canadian can make." That’s a statement that’s been heard
over and over again from financial advisors. An RRSP (registered retirement savings plan)
should be the cornerstone, the major building block, to help ensure your retirement
income.
If you are a member of a company pension plan, an
RRSP should be used as a supplementary investment. If you have no company pension plan, an
RRSP is a must.
The major reason to contribute to an RRSP is to
provide retirement income. An added value is the deferral of taxation on both the funds
contributed and the investment income earned in the plan. You do not pay tax on the funds
until you withdraw them, which is usually after retirement when both your income and your
tax bracket are probably lower.
For the 2003 taxation year, you can contribute 18
per cent of your 2002 "earned income" (up to a maximum contribution of
$14,500)
to an RRSP, for a company pension plan or deferred profit
sharing plan the maximum for 2003 is $15,500 . Revenue Canada reports your RRSP deduction limit for the current year on the
notice of assessment issued for your previous year’s tax return.
However, this notice will not be received until part
way through the current year; for example, if you filed your prior year’s return on
April 30th, you likely wouldn’t receive notice of your contribution limit
until June or later. If you want to make early or monthly contributions for the current
year, you should ask your insurance and financial advisor for help in calculating your
deduction limit. This is important, since over-contributions of more than $2,000 attract a
hefty penalty tax.
If you don’t make your maximum allowed
contribution you can make up the difference in future years. But remember, the longer your
money is in the plan, the larger it grows.
RRSPs may seem straightforward; however, they can be
complicated by the many ways to invest. These include segregated funds, mutual funds,
guaranteed investment certificates (GICs), fixed-income securities, Canada Savings Bonds,
qualified mortgages and cash including foreign investments up to 20 per cent of the book
value of your RRSP.
There are a great many other rules and options of
interest to RRSP investors. Your insurance and financial advisor can help you make the
right decisions and help ensure your retirement income security.
