Text By Darcy Penner
The RSP contribution deadline for the 2008 Tax Year is February 28, 2009. Here are six strategies to help you get the most out of your RSP each year:
Get expert assistance
The services of a qualified investment advisor can be invaluable to keep you informed of the options available to you and make the right long-term investment decisions. Together, you should review your plan at least once a year to make sure that it is still on track with your long-term goals. As your financial situation becomes more complex you may also want to consider using a tax professional.
Short on cash? Consider borrowing.
Taking out an RSP loan to “top up” your RSP contribution makes sense – especially if you can pay off the loan with your tax refund. The interest rate for RSP loans is usually set at or near the prime rate and the benefit of sheltered growth of your investment over the long term will far outweigh the interest cost.
Consider opening a self-directed RSP
Self Directed RSPs are “umbrella plans” that permit an investor to hold eligible products from a variety of institutions including GICs, bonds, mutual funds and stocks – all in one place. Most self-directed plans have an annual fee but that fee is usually waived if you maintain a certain minimum balance in your portfolio.
Even if you are strictly a mutual fund and GIC investor it makes sense to have the best investments from various institutions in your RSP. The ability to explore a wider choice of opportunities could translate into a greater potential return for your RSP portfolio.
Utilize spousal RSPs
Ideally, you want to structure your RSP portfolio so that at retirement you have roughly the same income as your spouse when you take into account your pension plans and other sources of income. For example, a couple that receives $30,000 each will pay much less tax than if one spouse receives $60,000.
A spousal RSP allows the spouse with the higher income to contribute to an RSP owned by the lower-income spouse. The spouse with the higher income takes the immediate tax deduction, but the money in the RSP will be reported as income by the other spouse when it is withdrawn.
Diversify…but don’t over-diversify
Your investment options come down to three main asset classes: cash (GICs, treasury bills, money market funds), bonds (corporate, government) and stocks (equity mutual funds, exchange-traded securities). Rather than guess which asset class will perform best each year, it is a good idea to invest in EACH asset class. The percentage that you allocate to each asset class will depend on your personal tolerance for risk and the time horizon for your RSP.
Be careful not to over-diversify – especially with mutual funds. Mutual funds already have built-in diversification with some portfolios containing hundreds of securities. It isn’t necessary to have two mutual funds with similar portfolios.
Re-balance your portfolio
Each year you should determine whether your RSP portfolio is in line with your goals and whether it needs to be re-balanced. This involves maintaining your original percentage allocations to each asset class. For example, let’s assume your desired allocation to each of the three asset classes is exactly one third. If the stock portion of your portfolio increased by 25% while bonds and cash only managed 5% returns, you would either transfer funds from stocks to bonds and cash and/or allocate a new purchase with a greater emphasis on bonds and cash-type investments. In effect, this is a process of buying low and selling high.