Posted by Cory List on 5th Mar 2015
Grow Your Retirement Funds through Investing in Your RRSP
Most business owners focus all their attention to growing and expanding their business that they usually set aside the importance of saving for retirement. There is a tendency to put all your hard-earned funds into additional investments that will help your business grow. Oftentimes, retirement funds or pension plans are just left alone to grow on their own, based only on the interest rate that is being offered by the financial institution where the funds are currently held. However, there is currently a lot of potential in growing your retirement funds and seeking to build the future you want not just by having a stable business, but also realizing the benefits of your retirement funds to its full potential.
Tax Benefits of Investing in an RRSP
We all know that each dollar deposited into a pension plan is deductible from one’s taxable income for a particular calendar year. Aside from this tax incentive, any earnings from investments made in an RRSP are tax deferred. You will only have to pay taxes on the funds that you will withdraw when you reach your retirement age.
This may not sound like a significant benefit, but it can spell a lot of difference on how much you can potentially earn if you decide to invest your retirement funds instead. To illustrate, assuming you would like to purchase a thousand dollars’ worth of stock of a certain company. When you decide to sell these stocks when the price reaches $2,000, you will immediately be liable to pay a capital gains tax for the $1,000 you earned because of the sale. However, if you use the funds in your RRSP to buy and sell the same stock at the same prices mentioned, you do not have to pay any taxes at all, unless you are going to withdraw the $1,000 you earned.
Maximizing the Allowable Contribution Amount
Another way to maximize your earnings through your RRSP is by contributing the maximum amount allowed. Although the general limit set by the government for 2015 is $24,930, but your specific limit will be the lower of that amount or 18% of your earned income for the previous year. The government only allows an excess contribution of $2,000 for the entire duration of your plan. By contributing the maximum allowable amount, you are able to maximize the amount that you can invest for tax-free earnings.
You should also know that you have the option to carry forward to the following year any excess amount that you are not able to contribute for the current year. For instance, if for 2014 you were eligible to contribute up to $24,270 and you were only able to put $20,000 due to some circumstances, you have the option to file some paperwork so you will be able to contribute the remaining $4,270 for 2015. This is also an acceptable practice if you wish to defer tax deductions.
Fees and Costs to Watch Out For
The fees involved in investing through your RRSP will entirely depend on how you plan to manage your account. The fees and charges depend on how much your current financial institution is charging for account opening and maintenance, and if there are certain transaction fees and charges when buying and selling securities. Normally, these fees are automatically deducted from your RRSP. Therefore, you should be able to determine whether the fees and charges are lesser than the amount you are actually earning.
If you would like to maximize your earnings, you could also seek the assistance of financial advisors or wealth management planners. There are some institutions that charge a fixed fee for financial advice and for all the trades that will be made in your account. This is recommended if you do not have the time, or the knowledge and skills to invest on your own, as you do not have to worry about recurring transaction fees that could just eat up your earnings on the trades that will be done in your account.
You also have the option to open a self-directed account. This can help you save a lot because you do not have to pay for someone to give you investment advice. You will only have to pay for the transactions that you are going to place, and you do not have to pay for investment advice. This is recommended if you already have some background in investing and you would just like to put your skills and expertise into growing your retirement funds.
Getting ready for retirement is something that you should not set aside. You will not be able to earn back the losses you have incurred for each year that you are not able to maximize your allowable contributions, or for each year that you were not able to invest your retirement savings in financial instruments that could help you gain more interest. Your retirement years will be more satisfying if you have enough funds to treat yourself and your family to a relaxing vacation, or if you still have enough money to buy the things you want, or enough funds for your medical care. It would be more fulfilling if you do not have to rely on other people for your basic needs. By taking action now and making good use of your retirement funds through tax-deferred investments, you are working your way towards a better and brighter future ahead of you.