5 Reasons to Open an RRSP Right Now!
A big part of being a confident and bossed up individual, is having your own money and being financially independent. Let me preface this post with a disclaimer: I am by no means a financial advisor, guru, expert or anything of the sort. But what I can tell you is, I like money and have been working in the banking field for over 7 years. As a result I have learned (and I am still learning) a thing or two about the importance of credit, savings, investments, etc. Especially when it comes to retirement. When retirement time rolls around you need to ensure you have enough savings to maintain your living expenses, necessities, and your overall lifestyle. I don’t know about you, but I for one want to retire as early as possible and I want to be living lavish and comfortable. Canada Pension Plan and Old Age Security likely won’t provide you with enough income alone to support your living expenses (hence why you see people well over 65 still working in your office, asking you how to rotate a PDF). You also have to consider the fact that the cost of living by the time you are ready to retire is going to be much higher than it is right now. That’s why it is extremely important to not only take advantage of employer pension programs and plans, but to also start your own retirement savings as well. That’s where the RRSPs come in. A Registered Retirement Savings Plan (RRSP) is a savings plan that is registered with the Canadian federal government. You can hold a diverse range of investments within an RRSP, including mutual funds, stocks and bonds, and GICs (guaranteed investment certificates). In this post, I will cover 5 reasons you should start saving with an RRSP today!
1. The earlier you start, the more money you will have when it’s time to retire
It’s common sense that the earlier you start saving, the more money you will have at the end of your goal. When it comes to RRSPs this holds true but it’s goes even deeper than that, due to the fact that the money in an RRSP earns interest and compounds over time. Therefore, the longer your money stays in this tax sheltered investment, the greater it will be valued when you are ready to retire. That's why it is extremely beneficial to start contributing to an RRSP as early as possible. The table below depicts how the same total investment can yield much different values based on how long the money was being contributed versus the total dollar value of the money invested due to compound interest.
(source: Desjardins)
2. Contributions are tax deductible
IT’S THAT SEASON! Contributing to an RRSP will help to reduce the amount of taxes you owe the government come tax season; which can likely lead to a refund (yay!) instead of taxes owing. RRSP contributions are input on the section of your tax return that is used for determining your total net income. The lower your net income, the less income tax you have to pay. When you contribute to an RRSP, it reduces your net income on your tax return. So in simple terms, investing in RRSPs offers you a tax break.
3. Grow your savings on a tax deferred basis
Most non-registered investment accounts require you to pay tax on capital gains, dividends, and/or interest income earned for each tax year. However, with an RRSP you won’t pay any tax on investment income earned inside your plan as long as the money stays in the plan. At retirement, when you withdraw from your RRSPs they will get taxed as income. However, the benefit here is that your marginal tax rate will likely be lower in retirement than it was during your contributing years when you were employed.
4. Borrow from your RRSP to buy your first home or pay for your education
You can withdraw up to $35,000 for a down payment on your first home under the Home Buyers’ Plan (HBP) and up to $20,000 to pay education costs for yourself or your spouse under the Lifelong Learning Plan (LLP). These withdrawals won’t be taxed as long as you pay the money back within the specified time periods set out by the plans (15 years for Home Buyers’ Plan/10 years for Lifelong Learning Plan).
5. You don’t need much to get started
Any Canadians under 71 years of age that have earned income in the previous tax year (and reported it on their tax return), are able to open and contribute to an RRSP. You do not need any lump sum of money upfront to start, and can opt for contributions that comfortably fit your current budget. When I first started, I was only contributing $25 each pay cheque. You can open them with almost any financial institution and some even allow you to open them online. The process is extremely easy, so there is no reason you can’t get started right NOW!
I hope you found this article helpful and it helps you realize that’s it’s never too early to start planning for your future. Thanks so much for reading! If you enjoyed this article or have any tips if your own, leave a comment down below! Don’t forget to subscribe to our newsletter to make sure you do not miss any posts in the future!
Love always,
Dej
