You did the most important part. You made your annual contribution to your RRSP. But, now that the first 60 days of the New Year are over, contributions will apply to the next taxation year. That is the taxation year 2018. You can relax now until the RRSP season next year.
Wrong. The most important part of the process is just beginning. You now need to invest your recent contribution. So how does one go about investing an RRSP contribution? Over the next few months I will try to give you an idea of how to invest your savings wisely.
The first thing that many do is put their RRSP contribution into the equivalent of a savings account. I know. I’ve been guilty of this myself. However, that may not be the wisest course of action. Savings accounts are paying very low interest. At the time of writing less than 1% per annum is not uncommon. With inflation at 2% and the fact that you will have to pay income tax on their earnings in your RRSP eventually you may actually lose a part of your savings if you leave them in a savings account. They certainly won’t grow at the rate necessary to fund a comfortable retirement.
The other most common thing that RRSP contributors do is buy a mutual fund. Usually a common stock-based mutual fund often recommended by the person who opened the RRSP for them. This could be a good choice. Unfortunately it is often a poor choice for several reasons.
The questions you need answered before making such purchases are as follows:
- Are the stocks in the mutual fund likely to increase in value in the coming years?
- Are the stocks consistent with your risk profile?
- Are there better, less costly investments available?
- Does this investment fit with your investment plan?
I will explore these topics further in future blogs.