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Retirement savings planning should be a year-round sport

Since hitting my mid-thirties, I've noticed that I've become more forgetful. Brain cells don't regenerate like they used to. My wife, Carolyn, is the same. We were in Niagara Falls last weekend and stopped for lunch. Carolyn left her glasses sitting on the table, but didn't notice until we were 20 minutes down the highway. By then, I had to travel quite a distance before I could find a place to turn around.

I was furious. I fussed all the way back to the restaurant. When we finally arrived, Carolyn got out of the car to retrieve her glasses.

"Carolyn," I said, "while you're in there, you may as well get my gloves, too."

If you're like many Canadians, you may have forgotten to make your registered retirement savings plan contribution this year. Actually, you have until Monday to make that contribution, but many will neglect this task. Today, I want to focus on the balance of 2004, and some RRSP contribution ideas you should consider throughout the year.

Contribute

throughout the year.

No, this idea doesn't seem like rocket science, but you'll do yourself a favour by making regular RRSP contributions throughout this year, perhaps monthly, instead of waiting until the contribution deadline early next year. First, you'll get your money working for you sooner. Second, a preauthorized monthly contribution is a forced savings method that doesn't let you forget to contribute.

You can also avoid having to borrow to get caught up on your contributions if you're in the habit of saving the right amount monthly. What's the right amount? It depends on your desired income in retirement, how much you've saved already, your expected rate of return, and how long until you retire. A trusted financial adviser should be consulted if you can't do the math yourself.

Have your employer

contribute directly.

Consider having your employer direct a portion of each pay, or perhaps a bonus each year, to your RRSP. Your employer can send the payment directly to your RRSP carrier provided you have the contribution room, and you'll avoid all income tax withholdings on that amount. For example, if you received a $10,000 bonus directly and had a marginal tax rate of 46 per cent, $4,600 would be remitted to the taxman and you'd receive just $5,400 (less any Canada Pension Plan/Quebec Pension Plan and Employment Insurance deducted) with which you could make a contribution to your RRSP. If your employer, however, sends the $10,000 directly to your RRSP carrier, there would be no taxes withheld, and you'd have a $10,000 contribution (less CPP/QPP and EI) to your RRSP, not a $5,400 contribution. Effectively, you're receiving your tax refund up front, and it's going into your RRSP, too. It's a great way to get more money into your RRSP than you might otherwise be able to contribute.

Avoid overcontributions.

While you're allowed to overcontribute to your RRSP by a cumulative (not annual) $2,000 without a penalty, I don't believe it makes good sense. Why? Because you're not entitled to a deduction for the $2,000 overcontribution, but you will face tax on it when it's withdrawn. You see, you can mirror the tax-sheltering of your RRSP by investing in a tax-efficient manner outside your RRSP. If you achieve this tax efficiency, you'll be better off at the end of the day with this $2,000 outside the RRSP since liquidating those dollars later will give rise to capital gains, which are more tax-efficient than withdrawals from the RRSP.

Consider an advance

contribution.

If you're turning 69 in 2004, and you have earned income this year, you will be entitled to RRSP contribution room next year. The problem? You won't have an RRSP next year since it must be wound up by the end of this year.

No problem. Consider making your 2005 RRSP contribution in advance of winding up your plan. This advance contribution can be made in December of this year, which may give rise to an overcontribution penalty for that one month. Provided you have the RRSP room next year, however, you'll be entitled to deduct that advance contribution in the year 2005.

The tax savings from that deduction will far outweigh the one-month overcontribution penalty (which will be 1 per cent a month of the excess contribution in 2004; a $15,000 overcontribution in December would give rise to a $135 penalty after factoring in the $2,000 allowable overcontribution).

Make a spousal

contribution after 69.

Who says you can't contribute to an RRSP beyond age 69? If you have RRSP contribution room beyond age 69, you can make a contribution to a spousal RRSP for the benefit of your spouse, as long as he or she is under age 69. You'll get the tax deduction, while your spouse can face the tax on withdrawals.

tcestnick@aic.com



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