(NC) - Coming up with a significant amount of cash in order to make a lump sum contribution to your RRSP can be difficult. Financial planning experts suggest that monthly instalments, withdrawn automatically from your bank account, may be less financially painful and give you additional advantages.
According to Aurele Courcelles, the director of tax and estate planning at Investors Group, monthly pre-authorized contributions allow you to take advantage of the rises and falls of the stock market through dollar-cost averaging while enforcing the personal savings discipline we wish we had on our own.
"Coming up with a significant chunk of cash before the RRSP contribution deadline can be difficult," says Courcelles. "Setting up a regular payment plan with an amount that you can afford will not only ensure that the money makes its way into your retirement savings, but also that you benefit from the compound investment returns."
He provides the following example:
You set up a regular investment plan to invest an amount you can afford - $250 into your RRSP on the first of every month.
At a compound annual return of 6.5 per cent, you'll have $278,000 of pre-tax assets after 30 years.
If you wait until the end of each year and invest $3,000 in a lump sum, you'll have only $259,100.
By PAC-ing each month, you add potentially $18,900 to your retirement fund - and it doesn't cost you an extra penny.
Note that the rate of return in this example is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values or returns on investment. The illustration ignores the tax savings produced by the tax deductible RRSP contributions.
"Your regular PAC contributions generate a tax benefit for the current tax year and you immediately start enjoying long-term tax-deferred appreciation," Courcelles adds.
More information on this topic is available from the Investors Group, or contact a financial advisor to get specific advice about your circumstances.
(NC) - The Tax-Free Savings Account has been called the most important savings option since the 1950s launch of Registered Retirement Savings Plans (RRSPs).
Here's how a TFSA works
Every Canadian over the age of 18 is eligible to save at least $5,500 a year in a TFSA and the investments held within the TFSA grow on a tax-free basis. TFSA withdrawals can be made at any time for any reason - and the withdrawn money is tax-free.
The amount you can contribute in a given year is defined by the following formula:
Maximum contribution = TFSA dollar limit for the year + TFSA withdrawals from last year + Unused TFSA room from last year
The TFSA dollar limit has been $5,000 in each of 2009-2012 and is $5,500 for 2013 but is subject to indexation. Thus, if you had to make a TFSA withdrawal last year, your TFSA room this year will be restored to reflect that withdrawal. Furthermore, all the contribution room you don't use right away accumulates year after year so you can use it any time you choose.
Contributions to investments held in a TFSA do not affect RRSP contribution room.
TFSA-eligible investments are the same as those available for investments held within RRSPs, including mutual funds and money market funds, Guaranteed Investment Certificates (GICs), publicly traded securities, and government and corporate bonds.
How a TFSA works for you
It works for both short- and long-term financial goals like these:
Providing an immediate source of emergency funds.
Saving for just about anything - from a new car or cottage to a dream vacation.
Saving for the down payment on a new home or even starting a business.
Reducing taxes on your non-registered investments.
Adding to your retirement savings. TFSA withdrawals don't affect eligibility for such income-tested benefits as Old Age Security (OAS).
Splitting income with your spouse to minimize taxes.
More information on this topic is available from the Investors Group, or contact a financial advisor to get specific advice about your circumstances.
