As an addendum to your New Year's resolutions, how about making it a goal not to scramble to meet this year's deadline for completing your contributions to your Registered Retirement Savings Plan (RRSP).

Your contribution must be in by midnight March 1. The maximum 2012 contribution limit is $22,970. However, if you did not use all of your contribution room for the years 1991-2009, you can carry forward the unused amount to 2011. That way your contribution maximum for 2012 could be more than $22,970.

If you avoid waiting until the last minute, you have a better chance of making smart decisions about how much you want to invest, what you want it invested in and how much you want to put into the plan. Keep in mind that the sooner you put money into the plan, the longer it has to grow at a compounded rate.

For more than half of the owners of RRSPs, mutual funds are the investment of choice. And for many that choice that is well-suited to their retirement-saving strategy and provides a reasonable rate of return.
Moreover, the funds provide access to the shares of more companies, professional management and reduced valuation risk. Choosing a mutual fund also relieves you of the need to monitor the performance of individual stocks and lets that job fall to the fund managers.

Be sure you inquire about management fees; they can be high. Fund managers are commonly paid with a management expense ratio (MER). That is the percentage of the fund's assets that goes to the manager before any returns are paid out.

Fund tracker Morningstar has said that the median fund of Canadian funds is 2.5 per cent, more than double that in the U.S., where the median MER is 0.94 per cent. There is controversy surrounding these numbers, so be certain you consult with your adviser for guidance.

If you are the sort of investor who likes to have more control over your investments, you might consider opening a self-directed RRSP. It may provide greater investment flexibility and potentially higher returns, depending on your tolerance for risk.

Most self-directed RRSPs have an annual trustee fee to cover administrative costs. The fee may range from as low as $25 to $250 a year.

To help you determine if the fee is worth it to you, divide it by your portfolio balance. If you are paying $125, or $133.75 with GST, and your portfolio balance is $50,000, the annual fee is 0.27% of the portfolio.
Add to that other expenses such as trading costs, and transfer out and de-registration fees. Then ask yourself if you consider the money well worth it when weighed against the benefits of directing your own plan. In general, the advantages of taking control of your own RRSP include:

Consolidation: If you have more than one RRSP, you can simplify accounting and make it easier to track your investments by combining them. This can also cut administration costs.

You receive a single periodic statement summarizing transactions, income and expenses. Converting to an annuity or Registered Retirement Income Fund is also simpler when you reach 71 and must wind up your RRSP.

Diversification: There are a number of investments that qualify for a self-directed RRSP. You can choose from such conventional vehicles as cash, GICs, bonds, mutual funds and stocks as well as:

  • Small business corporations;
  • Bonds, savings bonds and debentures guaranteed by the federal government, or a province, municipality or crown corporation;
  • Shares and debt of Canadian public companies;
  • Certain annuities issued by Canadian companies;
  • Call options on Canadian equities or debt traded on a recognized Canadian exchange.
  • Debt obligations of corporations with shares trading on an eligible foreign stock exchange; and
  • Foreign publicly traded corporations and foreign government bonds with investment grade ratings.

Caution: There is a currency risk involved when you invest money outside Canada. Individuals over, say, 60 years of age, who will be making withdrawals soon for purchases in Canadian dollars, may want fewer foreign holdings than Canadians with a longer time line.

Mortgages: You can hold your own mortgage in your plan, which means you essentially lend yourself the money and pay it and the interest back to yourself rather than to a lender (see right-hand box).

Transfers: As part of your deductible contribution, you can transfer other investments into your plan, or sell them to your plan. If the fair market value at the time of the transfer or sale exceeds your cost, the difference is a capital gain. Capital losses cannot be deducted, so it's not necessarily a good idea to transfer or sell losing investments.

Final note: The options available require you to pay attention to the investments you choose. If a non-qualified investment is put into or bought by your plan, the fair market value will be included in your income. Moreover, any income earned on those investments is taxable.

Set up an appointment with your accountant to discuss potential investments and ways to maximize your retirement savings.

Lend Yourself a Home Loan

 
There is a way to increase your retirement savings that may even allow you to exceed the RRSP annual contribution limits. Lend yourself a home loan from your self-directed RRSP.

The main advantage of this strategy is that you may be able to pay yourself a higher rate on the mortgage than you have been able to earn on other low-risk, fixed-income investments. However, the mortgage interest rate could be significantly lower than the return on higher-risk investments.

Your self-directed RRSP is allowed to hold a mortgage on any residential or commercial real estate you own in Canada provided that:

  • Cash or cash equivalents in your RRSP equal the amount of the mortgage.
  • A lender approved by the National Housing Act administers the mortgage. (The lender will charge fees.)
  • The interest rate and terms of the mortgage reflect typical commercial practices.
  • The mortgage is insured by the Canada Mortgage and Housing Corporation or by a private mortgage insurer.

 
With this strategy, your plan lends you the mortgage and you pay it back in regular installments. As an example, say you have a $200,000 mortgage and the same amount in your RRSP. You use the money in the plan to pay off the mortgage and then make regular mortgage and interest payments to yourself, that is, your RRSP.

If you set up an RRSP mortgage with a 25-year amortization period and you are paying yourself back $1,400 a month, you will eventually contribute more than twice the amount you took out.

This strategy may let you put in more than the allowable RRSP annual contributions. How? Your contribution limit is based on annual income. But when your RRSP holds a mortgage, you must meet the monthly payments regardless of your annual income. They may add up to more than the annual contribution limit.

There are complicated rules and regulations regarding holding mortgages in a self-directed RRSP. Consult with your accountant.