RRSPs 101

RRSP Basics

• An RRSP is a Canadian registered investment account that lets you save for retirement and offers tax-deductible contributions.
• Your savings and investments grow tax-free while in the account.
• You can save money while you work through your RRSP until age 71. Once you retire, you can transfer your RRSP savings tax-free into a Registered Retirement Income Fund (RRIF) or annuity plan to get regular payments.

RRSPs vs. Other Investments

• RRSPs are similar to other registered investments, such as Tax-Free Savings Accounts (TFSAs) or First Home Savings Accounts (FHSAs), but they differ in a few key ways.
• To open an RRSP, you need earned income to contribute, unlike a TFSA or FHSA. Additionally, withdrawals from your RRSP are not tax-free.
• However, unlike a TFSA, your RRSP contributions are tax-deductible, there is an age limit for contributions, and the account is designed with a specific goal in mind.
• Luckily, you don’t have to choose between registered investments – you can hold a TFSA, FHSA, and RRSP all at the same time.

How RRSPs Can Help

Tax Advantages, Compound Growth, and Flexibility

• All contributions can be claimed as a deduction on your tax return, and the deductions can be carried forward. This will help reduce the tax you may potentially owe.
• You won’t pay tax on any investment earnings as long as they stay in your RRSP. This allows for compounding, helping you to save faster.
• Each year, you can contribute 18% of your income, or the government-set limit – whichever is lower. Don’t worry, your unused contribution room never expires, so you won’t lose it.

Peace of Mind

• Aside from the tax advantages, RRSPs can provide peace of mind and long-term security.
• The earlier you start contributing, the more time you have to maximize your savings (especially with the help of compound interest!). Starting with small amounts from time to time can help build the habit of contributing to your future.
• RRSPs also reduce your financial stress, even if retirement is far away. Knowing that you have funds set aside for the future can give you a greater sense of confidence.
• Contributing to an RRSP provides you with a better chance of maintaining your lifestyle once you leave the workforce.

Tips and Tricks for Contributing

Start Early and Be Consistent

• The biggest tip for making RRSP contributions is to start as early as possible; that way, you can benefit the most from the power of compound interest.
• We recommend making several small contributions throughout the year – it’s less daunting than one large deposit, and you can get even closer to reaching your contribution limit. Additionally, you won’t have to stress in March when the contribution deadline approaches, since you’ve been making deposits throughout the year.
• With the benefit of your contribution room rolling over, you have time to invest next year if you don’t maximize your RRSP.

Review your Options

• If your employer provides an RRSP matching program, signing up and making automatic deposits to the account can help you reach your contribution limit faster than on your own.
• You can also invest in a Spousal RRSP if you are married or common-law. Spousal RRSPs aim to provide spouses with similar income and tax rates during retirement. Typically, the partner with the higher income will deposit the contribution in the other partner’s RRSP and claim the contribution on their return, allowing for lower taxes.
• Another option is to take out an RRSP loan to reach your yearly contribution limit. You will have to pay interest on the loan, but the tax benefits could outweigh the cost of interest. You can use your tax savings to help repay the loan.

Common Mistakes

• One of the biggest mistakes is not knowing your contribution limit. Overcontribution can cost you a penalty of 1% per month on contributions that exceed your limit by more than $2,000.
• Try not to withdraw funds from your RRSP before retirement. If you withdraw early, you lose that contribution room. You’ll also be subject to withholding tax, meaning that you’ll have to pay tax immediately on the withdrawal.
• You can hold many types of investments in an RRSP, including GICs, mutual funds, and more. Diversifying your RRSP through additional investments can help you earn more in the long term. Additionally, with market volatility, diversifying investments can help mitigate risk.

If you’re ready to take control of your retirement with an RRSP, we’re here to help! Contact our knowledgeable team of financial experts or view our current investment specials. Whether you are just entering the workforce or preparing for retirement, we’ll guide you through the process.