Retirement investing: 2 strategies to maximize your RRSPs

Here are two simple retirement investing strategies that can help you maximize your investments in RRSPs.

High-risk retirement investing

Planning your retirement investing and picking stocks for your RRSPs can be difficult. It can be tempting to pick higher risk (and potentially higher return) stocks for your RRSPs. However, we believe these investments are generally unsuitable for this type of retirement investing, and that higher-risk stocks should be held outside of an RRSP. That’s because if higher-risk stocks lose money in your RRSPs, you have a triple loss:

1) The drop in your RRSP’s value is the most noticeable part of your loss. But that’s just the start.

2) You also lose the tax-deduction value of a loss in your RRSP. Outside your RRSP, you can use capital losses to offset taxable capital gains in the current year, the three previous years, or any future year. A loss inside your RRSP simply reduces the tax you’ll pay on your final withdrawal from your RRSP savings because there will be less to withdraw.

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3) You lose the opportunity for tax-free compounding that the money would have enjoyed within your RRSP. After about 7 years in an RRSP, the ability of an RRSP contribution to grow and compound free of tax is usually worth more than the initial contribution itself. That’s why RRSPs are a bad place for aggressive investments of any kind. The potential losses that these investments could suffer are just too costly.

Withdrawing from RRSPs

There’s no direct way to take money out of RRSPs without paying income tax at the same rate as ordinary income. But here are a couple of ways to cut those income taxes:

1) You can make contributions to spousal RRSPs, so that withdrawals can be taxed in the hands of a lower-income spouse when money is taken out a few, or many, years later. It’s also a good long-range strategy to plan things so that you use spousal RRSPs to split your retirement income between you and your spouse. That can even out, as well as lower, the total tax burden on your retirement income as a couple.

Another way to lower the overall tax burden on your RRSP withdrawals is to make withdrawals in low-income years — even if you don’t need the money in those years. You’ll then lose the tax-shelter advantage an RRSP offers on future earnings, of course. But you may save tax in the long run, particularly if you invest your RRSP withdrawals in stocks you hold for many years.

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