The Registered Retirement Savings Plan (RRSP) is a popular retirement savings vehicle in Canada that allows individuals to contribute a portion of their income towards their retirement savings and defer paying taxes on that income until withdrawal. The deadline for contributions towards the 2022 tax year is March 1, 2023. If you've wondered about contributing to an RRSP or utilizing a Group RRSP offered by your employer, here are four things to consider:
RRSPs are not just for saving:
Many people think of RRSPs as simple savings accounts, but they can also be used as an investment vehicle. The funds within an RRSP can grow through compound interest and we are incentivized to keep the funds within the account until retirement because otherwise we’ll pay taxes and penalties on early withdrawals. While saving for retirement might not be top of mind for a young working professional, consider this example: Starting at age 35, if you were to invest $150 a month into an RRSP in an investment fund that generated an annual 6% return, by the time you reach age 71 (the age of maturity for RRSPs in Canada) you could expect your plan to be worth nearly $215,000. If you started investing at age 40 with the same monthly investment and the same rate of return, you would accumulate approximately $152,000. This example is very simple in that it assumes the same 6% rate of return annually and doesn’t account for a change in strategy, taxes or an individual’s financial situation – however, it demonstrates the power of compound interest over time. The earlier you start saving and investing, the more time compound interest has to grow your savings.
The primary benefit of RRSPs is that contributions made to the plan in your working years are deducted from your taxable income and can grow tax-free while the funds remain in the account. The longer you have to contribute, the more time your funds have to compound, resulting in a larger retirement nest egg. Once in retirement, withdrawals from your RRSP will be taxed at your retirement income bracket, which should be less than in your working years.
Lifelong Learners Plan and the Home Buyer’s Plan:
RRSPs have unique features to assist with certain expenses like continuing education or buying a first home. The Lifelong Learning Plan (LLP) allows you to withdraw up to $10,000 per calendar year to finance education for you or your spouse or common-law partner. The Home Buyer’s Plan (HBP) allows for withdrawal up to $35,000 to buy or build a qualifying home. Note that repayment of funds withdrawn is required starting the second year after you withdraw the funds, with 15 years to repay the funds in your RRSP. It’s important to note that failure to repay the funds can result in loss of contribution room and added tax liability.
Employers may offer a Group RRSP as part of their compensation package which can be a powerful savings tool. Employers may match a portion of your contribution and may offer a variety of investment options to suit different retirement dates, risk tolerances and asset allocation preferences. By fully contributing to your Group RRSP through your employer you can help maximize your retirement savings and take the guess work out of saving on a regular basis.
As tax time approaches, consider the benefits of RRSPs and if they are suitable for you and your retirement goals. It's important to keep in mind that while RRSPs offer a variety of benefits, they are not the only retirement savings option. As with any investment decision, it’s important to first do your research and understand your unique financial goals, risk tolerance and time horizon.
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