How to maximize your last-minute RRSP contribution

Mark your calendars: the deadline for Registered Retirement Savings Plan (RRSP) contributions for the 2020 tax year is March 1, 2021. But before you rush to deposit your money in a GIC or high-interest RRSP savings account at a local bank and call it a win, you should know there are other options that are just as simple and convenient—and better for your bottom line. Here’s how you can get the most out of your retirement savings all year long.  

Get more than a tax deduction

Sure, it’s great that you can deduct allowable RRSP contributions (up to 18% of your previous year’s gross earnings) from this year’s taxable income—which will fatten up your tax refund—but that’s just the beginning. You also want your hard-earned savings to grow over time and compound into a nice retirement nest egg. Unfortunately, the amount of interest you can earn on a GIC is quite low, sometimes even lower than the rate of inflation. So, by the time you’re ready to spend those funds, they won’t buy you as much as they could today. In other words, your purchasing power is actually shrinking over time in a low-interest GIC. 

A good way to ensure your retirement savings aren’t eroded by inflation over the long term is to invest in a diversified portfolio of low-fee investments, and that’s easier than you might think. 

Choose low-fee funds

Even first-time investors can achieve average annual returns that beat inflation—assuming they aren’t losing a big chunk of those earnings to fees. Canadians typically pay around 2% to 3% of their total investment portfolio annually for mutual funds handled by a portfolio manager, which means their investments would have to earn at least 3% more than the inflation rate just to tread water.

On the other hand, you could pay a fraction of that amount—as little as 0.2%—by investing in exchange traded funds (ETFs) and other low-fee investments inside an RRSP, through a discount brokerage such as Questrade*. The less you pay in fees, the more earnings you keep in your RRSP—and the faster those savings can earn returns on top of returns.

If you don’t feel confident in making your own investment picks, you can have a diversified mix of ETFs chosen for you using a robo-advisor such as Questwealth Portfolios*. Setting up an account is easy. All you have to do is visit the Questwealth Portfolios home page, create a user ID and password, answer some questions about your age, income level, comfort with risk, and approach to money, and Questwealth’s algorithm will determine the right portfolio for you—Aggressive, Growth, Balanced, Income or Conservative. An aggressive portfolio would be weighted toward riskier investments (which also offer the possibility of greater returns), while a conservative one will include more low-risk investments. 

Then select the type of account—such as an RRSP or TFSA—that you want to hold your investment portfolio in. (To qualify for the tax deduction, choose RRSP.) To open the account, you’ll need to provide your social insurance number and confirm that you are a Canadian resident for tax purposes. Now you can transfer money to your RRSP account by Interac payment or online bank transfer—and when you have at least $1,000 in your account, you can start investing!

Automate your contributions

Now that you’ve set up a portfolio of low-fee investments using this year’s RRSP contribution, it’s simple to add automatic monthly or quarterly contributions to your RRSP investment account for the future. Log in to your Questrade account, hover over “Funding,” and click or tap “Pre-authorized deposit” to set up a schedule of transfers.

There are a couple of good reasons for doing this. First, you won’t be left scrambling to make a contribution at next year’s deadline since you’ll have been investing in your RRSP all along. Second, by spreading out your contributions evenly throughout the year, you lower your exposure to market risk. This  strategy is known as dollar-cost averaging, and it keeps you from putting all your money into the market at an inopportune time—say, just before a dip—and ensures that your investments will benefit from the growth opportunities of purchasing when the market is down.

Don’t forget your TFSA

If you’ve maxed out your RRSP contribution room, congratulations! Now you can take a few more minutes to round out your set-it-and-forget-it approach to retirement investing by setting up automatic contributions to a Tax-Free Savings Account as well. Just like an RRSP, a TFSA can hold a wide variety of investments—including stocks, bonds, ETFs and more. TFSAs can be an excellent complement to RRSPs for retirement income, since all the growth on TFSA investments is sheltered from income tax and, unlike RRSPs, withdrawals are completely tax-free, too. As such, withdrawals from a TFSA won’t trigger clawbacks on the Old Age Supplement (OAS), a retirement benefit that must be repaid to the government each year if you exceed a certain income level.

So, this year, make the choice to do more with your RRSP contributions; your future self will thank you!

Questwealth Portfolios is a service provided by Questrade Wealth Management.