At this time of year, Canadian investors are preoccupied with four key questions about their Registered Retirement Savings Plans (RRSPs). My quick-take answers to these questions follow.
1. How much to contribute? Ideally, you should contribute your maximum allowed before the March 1 deadline. Your contribution is calculated as 18 per cent of earned income to a maximum of $23,820 for 2013 ($22,970 for the 2012 tax year), plus any unused contribution amounts accumulated since 1991.
2. RRSP or TFSA? Both are excellent vehicles that protect you from tax in different ways. RRSPs defer tax, and you get a tax deduction on contributions. TFSA investment growth and withdrawals are tax-free, but there’s no deduction on contributions. Much depends on your personal financial situation. If you can contribute the maximum for both, all the better.
3. How much do you need? On having enough at retirement, I’ve always been skeptical of any trite formulas (say, “70 per cent of pre-retirement income”) or magic lump-sum goals based on present-value calculations. I do put some faith in the idea that if you contribute 18 per cent of the previous year’s earned income (18 per cent is the amount CRA allows for RRSP contributions) every year, you probably won’t end up much worse off, relatively, than fellow citizens who do the same. From there, the differences in outcomes will likely depend more on how your contributions are invested than on how much you contribute in the first place.
4. Where to invest? Remember, an RRSP is nothing more than a container – one account among many where you can store your investment capital and just one part of your whole portfolio. When you’re deciding where to invest this year’s RRSP contribution, don’t forget all your containers, from savings cash in the bank to GICs in a trust company to your cash and margin accounts, plus all your registered accounts such as TFSAs and RRSPs, and those of your spouse. Lump them all together and figure out your current asset allocation before deciding where to go from there.
Once you’ve got your overall asset allocation right, I would consider a quality equity mutual fund, such as the Dynamic Equity Income Fund, Series A, for an RRSP. The objective of this fund is to achieve high income and long-term growth of capital by investing primarily in equity securities that pay a dividend or distribution on a global basis.
Manager Oscar Belaiche has done well for its unitholders over the long term, with a 10-year compound average annual return of 11.2 per cent as of Dec. 31. The fund has a management expense ratio (MER) of 2.17 per cent, which is acceptable for those kinds of returns, and it offers a choice of front- or back-end loads.
David West, CFA, FCSI, is a regular contributor to Fund Library.
Provided courtesy of Fund Library, owned and operated by Fundata Canada.