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By Jim Middlemiss
Bankrate.com
Wednesday, March 02, 2005
Once you make it through another harried RRSP season, scrambling to make a last-minute contribution, you figure it's time to kick back and relax, right? Wrong. Now is the time to grab the RRSP tiger by the tail and tame it, so that next February, you don't feel under attack.
Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, "Before you can start investing that money wisely, you need to know your goals. When do you want to retire? Why are you saving that money? How much are you going to need? What's your risk tolerance?”
"Start now," urges Bruce Armstrong, director of investment savings programs. "Make a commitment to do something in the next 24 hours. Inertia is the biggest problem."
1. Figure out the funding
You don't have to wait until you file your tax return and for the government to tell you officially what your RRSP contribution limit is for the next tax year. You should have a rough idea of what your limit is, based on your income and previous limits, and you should start contributing something today.
"It doesn't have to be huge," Armstrong says. A good way to start is by paying yourself first, a little each month. "Don't write a cheque," he says, because that requires too much discipline. "Have it set up so it comes out of your account, and put it where you want it. Do it on a payday so it's painless."
Don't simply focus on your annual limit -- think about the big picture. Chances are you're one of the millions of Canadians who have accumulated a whack of unused RRSP room.
Daniel Elizondo, a financial advisor, says now is the time to make up for those missed contributions and develop a strategy for eliminating unused RRSP room. Examine your financial holdings because many people have money needlessly sitting in poorly paying savings or chequing accounts, where it doesn't do them any good.
"It's a good time to transfer that money to an RRSP. Make your annual contribution as soon as possible," says Elizondo. "The earlier you get it into your plan, the longer it has to grow."
2. Don't loan the government money
One way to do that is not to spend your income tax refund, says Tina Di Vito, vice-president. "Don't spend it on a vacation. If you borrowed money to make the RRSP contribution, use the refund to pay that loan back as soon as possible."
Di Vito also advises making sure you don't get a refund next year because that means you are essentially loaning money to the government for politicians to spend at their leisure.
If you have a record of making regular RRSP contributions, you can avoid getting a tax refund by asking the Canada Revenue Agency to allow your employer to deduct less tax off your cheque. All you need to do is fill out a T1213 form, which you can download from the CRA's web site.
3. Get your financial planning house in order
Now that you have the money angle figured out for next year, you need to crank it up a notch by mapping out a game plan, says Adrian Mastracci, an investment counsellor with KCM Wealth Management in Vancouver.
"Investors spend too much time on the selection of investments and not enough time on the policies and strategies they ought to be following," he says. Before you can start investing that money wisely, you need to know your goals. When do you want to retire? Why are you saving that money? How much are you going to need? What's your risk tolerance?
"The majority of people don't have a strategy or plan in place," agrees Elizondo, noting that without one, investors often lose interest in investing.
4. Avoid investing in last year's winners
Once your game plan is in place, you can start selecting investments, says Mastracci. Avoid those that outperformed the market the previous year. "That's not where the action is," he says, referring to studies showing that last year's winners seldom live up to their billing in subsequent years.
5. Diversify, diversify, diversify
Armstrong recommends putting your money into a diversified investment recommended by your advisor. "I think the simplest thing to do is pick a good balanced fund and dollar cost average into that on an annual basis," he says. As your portfolio grows, you can diversify into other investments.
Elizondo adds that for those with larger portfolios, now is the time to review them and ensure they are properly diversified with a blend of income and growth investments.
6. Look abroad
"Maximize your foreign content," says Di Vito. Foreign content limitations were eliminated in the 2004 federal budget, so Canadians can now invest as much of their RRSP savings outside the country as they want. That means you should re-examine your asset mix as it pertains to geography.
7. Consolidate RRSP accounts
Di Vito says you should use this quiet period to consolidate your RRSP investments and get them under one roof so they're easier to manage. She says one common problem is that people have 20 to 30 different mutual funds spread out in four or five accounts at different financial institutions. Multiple accounts, she says, "make no sense. You never know how much you have."
8. Split your income
Financial experts agree that you need to examine whether a spousal RRSP would benefit your family. If the higher-income-earning spouse already has a nice pension plan and the other spouse doesn't, then consider opening a spousal plan to split income in retirement, says Mastracci. "You want to have as equal (retirement) income as possible." For more information on setting up a spousal RRSP, see The advantages of spousal RRSPs.
By taking the time now to tackle how you plan to fund your RRSP, where you want to go and what you want to invest in, you'll reduce the stress of RRSP season and simplify your life. And you just might tame that tiger.
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