With the RRSP deadline almost here, here's what you need to know

(Getty)

The deadline for contributing to a Registered Retirement Savings Plan (RRSP) while reducing your tax bill for 2018 is March 1. You can still add to it after, but contributions will be part of the following year’s tax return.

Taxes on money contributed to an RRSP are deferred until retirement, growing tax-free until it is withdrawn, when you’re likely in a lower income tax bracket. Dec. 31 of the year you turn 71 years old is the last day you can contribute to your RRSP.

But an RRSP is more than just a retirement savings vehicle, especially for young people.

“RRSPs shouldn’t be overlooked by millennials based on their flexibility to double both as a retirement savings vehicle or savings towards your first home,” Jordan Damiani, Senior Wealth Advisor for Meridian told Yahoo Finance Canada.

“Making regular pre-authorized contributions each time you get paid is a great habit to start at an early age with the added flexibility to know that up to $25,000 from an RRSP can be used towards a home purchase prior to retirement.”

An RRSP isn’t the only game in town when it comes to tax-advantaged savings vehicles. A Tax-Free Savings Account(TFSA) works in reverse compared to an RRSP. After-tax money is contributed to a TFSA, but you never pay tax on the gains. Depending on your income, a TFSA may be the better choice.

“I generally recommend that if an individual has a taxable income below $42,960 that it would be optimal to contribute to a TFSA over an RRSP. An RRSP contribution below that income level may offset at most 20.05% in tax owed, but all the growth that accumulates within the RRSP is taxed upon withdrawal at retirement, likely at the same rate, or worse, higher,” said Damiani.

Considering debt-to-income ratios are hovering around record-highs, many Canadians might feel tackling debt should be the priority over saving for retirement. Damiani says credit cards and other high-interest loans can be consolidated at a lower rate while saving for retirement at the same time.

“Debt repayment and savings go hand in hand and should be equally prioritized through-out one’s lifetime. The goal being to ‘pay yourself first’ with a pre-authorized savings off each paycheck, while also targeting to be debt free prior to retirement,” said Damiani.

“Aggressively paying down a mortgage is a great idea, but may leave someone without the time for their savings to compound and grow to fund retirement. Only focusing on saving may also leave an individual off-balance with a large debt load and continued payment obligations into retirement.”

You don’t need to decide how contributions are invested by the deadline. Even a simple savings account within an RRSP will do and can be opened quickly ahead of the deadline. Eventually, you’ll need to make some decisions to grow your nest egg. A typical portfolio could contain something like 60 per cent stocks and 40 per cent fixed-income like bonds, but long-term investors might want to rethink the formula.

“In terms of a strategic allocation, we believe that investors have enjoyed the benefits of a 60/40 approach for a generation, aided significantly by fixed income returns in an era of falling interest rates.” Michael White, Portfolio Manager of Multi-Asset Strategies at Picton Mahoney Asset Management, told Yahoo Finance Canada.

“We are not here to add our voice to the chorus that ’60/40 is dead’, but it is clearly challenged to deliver on what investors have come to expect from it.

White looks beyond the traditional two asset classes of stocks and bonds to include nine categories including commodities, as well as short-selling. White also aims to keep volatility to a minimum because he’s found investors make bad decisions when markets are gyrating. Overall, he advocates a long-term approach.

“We don’t believe investors should try to time markets. Indeed, as the old adage goes, it is all about time in the market, not timing the market,” said White.

Download the Yahoo Finance app, available for Apple and Android.