Financial: Win your race to financial security by playing RSP catch-up

Marathon runners must top-up their fluid levels at regular intervals during a race or they will never make their personal goal times at the finish line. The same strategy is true for you in the long race toward financial security at retirement. If you don't top-up your RRSP at regular intervals along the way, you'll never reach your financial goals at the retirement finish line. But unlike those marathoners, you can catch-up to peak RRSP performance even if you've neglected your RRSP top-ups for years. Check out this proven strategy for long-term RRSP success:

Makeyour maximum contribution every year

You have until March 1, 2006 to make your contribution and get a deduction for the 2005 tax year. And the more you invest now, the more growth potential you'll have for your retirement later. That's because of the miracle of compounding– here's an example that shows its power to produce manyextra dollars:

At age 25, you begin contributing $250 a month in your RRSP. At an annual return of 8%, your RRSP investment will amount to $577,294 on a pre-tax basis at age 60. Wait until age 30 to begin contributing $250 a month and you'll have only $375,074 when you're 60. You'll have contributed about $15,000 less but those five years of inaction will cost you just over $200,000.
Your maximum allowable RRSP contribution is based on your income. Let's say your contribution limit is $4,500. Your $250 a month RRSP contribution amounts to $3,000 a year – so you can top-up your contributions by $1,500 for the 2005 tax year. Do that for 35 years (at an 8% annual return) and you'll add another $280,000 of pre-tax growth to your retirement plan. And it gets even better: you also get a tax deduction for each $1,500 of top-up money you invest.

Catch-up to peak RRSP performance

If you haven't been able to make your maximum RRSP contributions for a number of years –it's time to play catch-up. There are no restrictions on how long you have to make up for missed contributions, as long as you contribute before the younger of you or your spouse reach age 69. If your maximum allowable RRSP contributions for the last 10 years add up to $20,000 and you were able to contribute only $10,000 over that time, you still have a $10,000 tax-deferral opportunity available to you this or any future tax year.

Borrow to win

If you're cash-strapped at tax time, you may still find the money you need to top-up or catch-up to your RRSP contribution with an RRSP loan. This strategy works only if you get an attractive loan interest rate and pay off the loan as quickly as possible, but it can bring big financial benefits – here's how:

You borrow $10,000 at 7% over two years and make monthly payments of $448. Your total loan interest is $750.
If your marginal tax rate is 40%, your $10,000 deduction will generate immediate tax savings of $4,000.
Assuming you have 20 years left to retirement, your $10,000 will grow to $46,600 on a pre-tax basis (at an annual rate of return of 8%). Deduct your lending costs and you're a $45,850 winner at retirement.
Pay off your loan earlier by using the extra tax refund from your increased RRSP contribution and you're even farther ahead.

The race to financial security takes many steps. Is an RRSP loan one of the right steps for you? A professional financial advisor can help you map out all the right steps in a winning financial plan that meets all your goals.

The rate of return is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values or returns on investment.

(Information supplied by Damon Smith, Investors Group Financial Services Inc. For more information call 888.335.1362).

This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.

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