Tips to investing in RRSPs

Let's start with an obvious but important question. What is an RRSP?

You may know that RRSP stands for Registered Retirement Savings Plan. But it's easy to be confused about what that really means.

If you think you buy an RRSP, you wouldn't be the first person to make that mistake. Actually, you buy investments -- mutual funds, stocks, bonds, guaranteed investment certificates, annuities, etc. -- and register them with the federal government. When you retire, you'll be able to use the money that comes from the investments.

Is it a good idea to invest in an RRSP?

The simple answer is yes. Many people are putting their money in RRSPs because they've been told they can reduce the amount of income tax they pay. They think, "Okay, I'm getting this tax savings every year. It reduces my taxable income, so my overall taxes aren't going to be as high." For a lot of people, that's a good enough reason to contribute to an RRSP. Paying less income tax has always been a good idea.

If you're self-employed, you have another reason to invest in an RRSP. It may be the only way to save for retirement, since you probably aren't working at a company that sets up pension plans for its employees.

Whatever your reasons, the most important thing you can do as far as investing in RRSPs is concerned is to start contributing regularly as early as possible. When you start early, you give your money more time to grow.

Let's say you're 45 years old and put $100 dollars into RRSP investments every month and don't make any withdrawals. We'll assume a return of 6% per year. At age 65, the total value of your investment would be $45,344. Now, if you're 25 years old and invest the same monthly amount with the same return and don't make any withdrawals, the total value of your RRSP at 65 would be $190,768. You can see how the extra two decades of investing makes a big difference.

Perhaps you're thinking that you don't have $100 to put away every month. Try investing in small doses by setting up a plan where your contributions flow directly from your bank account to your RRSP on the day you're paid. A few dollars now will go a long way later. You'll be surprised at how quickly your RRSP will grow -if you contribute regularly!

Think about borrowing money to invest in your RRSP. At today's low interest rates this can be a very effective strategy. You will reduce your taxable income and may increase your tax refund. Many people then take that refund and use it to help pay off their loans. Ask your advisor if this approach makes sense for you.

Remember: the best thing you can do for your retirement fund is to put away the maximum amount allowed by the government. If you're short, you can take out a "catch-up" loan. Or, you can carry forward your unused contribution to a future year.

You can also help your money grow by including foreign investments in your RRSP. Canada is a big country, but it makes up only a small part of the global investment market. There are lots of great opportunities to invest outside our borders and the federal government has no limit on investing your RRSP in foreign securities.

To keep track of all your assets, you may want to consider keeping them in one investment company. There are distinct advantages to this strategy. You'll receive more effective advice because your advisor has access to your full financial picture. And you'll be able to see all or most of your investments by looking at one statement.

Nobody's financial situation will be exactly the same as yours. That's why your financial strategy should reflect your needs, desires, and goals. Professional money managers can help because they understand the complexities of the market. Don't be afraid to ask for help from the pros!

© Sun Life Assurance Company of Canada,