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Top 10 Dos and Doníts in RRSP investing

by Wayne Cheveldayoff, 2005-02-17

The goal of RRSP investing is a comfortable retirement. Here are 10 guiding principles that will help you in the end say, ďI did my best, no regrets.Ē

1. Take full advantage of the power of tax-free compounding by contributing as much as possible early in life. A common regret among those now approaching retirement is that they did not put enough money into an RRSP early on, thus missing out on the virtuous circle of earning returns upon returns for decades. If you havenít yet, go to one of the financial websites and use the calculators to see the astounding amount more a retiree has at age 65 from putting $10,000 into an RRSP at age 25 rather than age 45 or 55.

2. Work hard to research alternatives or use an investment advisor to achieve the highest possible longer-run returns for your RRSP. An initial sum of $10,000 will grow into a lot more at a 7 per cent return compounded over 35 years than it will at a 5 per cent return.

3. Donít take funds out of your RRSP unless you are in a dire emergency. Not only will the withdrawal be fully taxed as income, you will miss out on the tax-free compounding. In the meantime, you will also be giving up valuable RRSP contribution room. With interest rates low, it may make more sense to borrow the money you need. While sums taken out for education or a house purchase are not subject to income tax, there will still be a drag on RRSP growth since they will earn no return until they are paid back.

4. Donít borrow to contribute unless you are sure you can easily pay the money back within a year. Interest on such borrowings is not tax-deductible. While some people canít bring themselves to save unless they are paying back a loan, it would be wiser instead to work on a budget and set up a Ďpay yourselfí regular monthly contribution plan.

5. If you have the funds, contribute to an RRSP as early in the year as possible. By waiting until the last minute, you are giving up tax-sheltered investment returns that can compound into a sizeable sum over the years.

6. Use spousal RRSP contributions to facilitate income splitting in your retirement years. Spreading out the eventual withdrawals over two people will lower tax rates.

7. Diversify your RRSP investments the same way as large pension funds, spreading them out among stocks, bonds, income trusts and hedge funds. Diversification lowers risk while maintaining a reasonable rate of return over time.

8. Raise the foreign content of your RRSP to at least the formal limit of 30 per cent and check out RRSP clone funds (which count as Canadian but mimic foreign indices or foreign mutual funds) to get to 50 per cent or more. By sticking with only Canada, you are missing out on potentially higher returns and greater opportunities. Canada has few world-class companies, especially in technology and pharmaceuticals, which can dominate their markets and thereby profitably reap the rewards.

9. Donít pay fees unnecessarily or without getting good value for your money. A prime example is a bond fund holding government bonds and charging a high management expense ratio (MER). With bond yields in the 3-5 per cent area, an MER of 1.5 or 2 per cent would chew up half or more of the expected return. A bond fund may make sense for corporate bonds, especially riskier high-yield bonds, where broad diversification of holdings is important to minimize the impact of a possible default. But it doesnít take much to learn how to do your own government-guaranteed bond and GIC investing with substantial savings on fees. Similarly, especially if you have a large amount to work with, it doesnít usually make sense to hold balanced funds since they charge MERs of 2.5 per cent or more on both the bond and equity components.

10. Set up your RRSP (with an investment advisor or discount brokerage) in a way that allows you to deal directly in stocks, bonds, and income trusts as well as mutual funds. You will save on fees and have access to a wider range of investment opportunities and better returns.

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. His columns are archived at and he can be contacted at

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©2005 Wayne Cheveldayoff