Imag BabyA few weeks ago I was approached by a writer from the USA who was doing an article on RRSP’s, comparing Canadian and American retirement planning strategies. He asked me to help him, as his knowledge of RRSP’s was about the same as my knowledge of 401K plans. (limited!) He had four simple but useful questions to answer – the only catch is the answers and questions together could only total 300 words.

For someone like me who likes to wax prolifically, this was an interesting exercise – I could not cover all the bases as I usually try to do. Rather – it was almost a case of answering instinctively, and let others fill in the blanks or take the topic in a different direction.

Anyway, here are the questions, and my answers:

• What is your single most important piece of advice for people considering a RRSP?

Unless you are planning to take advantage of the Canadian government’s very generous RRSP First Time Homebuyer Plan, do not start your RRSP too early in life. The tax benefit you gain at an early age may not be as big as the tax bite you absorb when you later begin to make withdrawals. Until then, use other savings vehicles. (e.g. TFSA)

• What’s the least well-understood aspect of RRSP’s?

People think contributing to an RRSP is a once a year activity, done only in January or February. This is when financial services companies really pump RRSP’s – they even call it “RRSP season.” Nonsense!

You should make contributions to your RRSP every month, all year round. Treat it as an important expense, much like your mortgage or car payment.

• Other than not having an RRSP, what’s the worst thing you can do vis-a-vis an RRSP?

Many people make a contribution, then leave it languishing in a ridiculously low interest savings account. The contribution is only the start. Yes, you will enjoy a tax benefit, but the important decision now is what to invest this money in.

• Talk briefly about the importance of diversification in your RRSP portfolio.

Diversification is a useful process in any investment strategy and RRSP’s are no different. You have to consider your risk/reward profile, and the number of years you have before you will actually need to access the money. Personally, I prefer growth opportunities for most people.

Ironically, the biggest RRSP portfolios I have seen were held by people who defied conventional wisdom. They under-diversified and put all their RRSP in just a few stocks or mutual funds. When the stocks took off, so did their RRSP value.

• Any other comments you would like to make? (beyond the 300 word criterion)

In the early days of summer, people get excited waiting for a large tax refund generated by their RRSP contributions. But it’s better you have your employer adjust your payroll withholding taxes at source to reflect your expected contributions, and enjoy the tax benefit immediately.

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