RRSP’s – Breaking Them Down

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We’ve all heard of RRSP’s. They grace TV ads; there are posters plastered at our local bank; there are ads on buses; even social media has ads peppered through our feeds. But what are they exactly and how do they benefit you?

I am sure the majority of us have grandparents or even parents who invested in RRSP’s when they were first introduced. It’s the government’s way of basically forcing us to save for our retirement by giving us tax breaks now on what we contribute; but are they all that they appear? Here are some common questions and answers that pop up frequently:

  1. What is an RRSP exactly?
    RRSP stands for Registered Retirement Savings Plan. Think of it as a safe place to put some money for investment for your retirement. As you contribute to your plan, it earns interest tax free (sort of).
  2. How does an RRSP work?
    When you are working, you are technically allowed to contribute however much you want to an RRSP but there are limits on how much are tax deductible. You are allowed to contributeĀ  18% of your annual earned income to an RRSP up to a maximum (for 2017, this maximum is $26,010.00). You receive a deduction for the amount you contribute on your taxes for the year you make this contribution up to the maximum. This tax break will lower the amount you have to pay OR give you a larger refund. It can be a great tool to effectively lower your personal taxes. Over the course of the term (up until you retire), you can direct your RRSP’s to certain types of investments (for example a common split is 60/40 for stocks and bonds). As you get older, you may want to change them to something less risky (say mutual funds). Any interest that these RRSP’s earn are tax free at the time. When the time comes to retire and start withdrawing the funds (by converting them to an RRIF), CRA will require you to pay tax on these. The best part is most people who withdraw, are at a lower tax rate than when they invested in them meaning they will pay less tax over the course of their lifetime.
  3. Why should I contribute?
    I hear a lot of people ask this question (I was one of them a year ago!). Why wouldn’t I just invest the money myself and not put it into an RRSP? The answer I always got (or heard the most) was why wouldn’t you? By putting your money into an RRSP, not only is it a tax deduction, but you can let someone else worry about making sure it grows. It’s a great way to force you to save for your retirement. If you put funds into a regular savings plan, you will always have the temptation to withdraw and spend on items today rather than saving for items tomorrow.
  4. When should I start contributing?
    The best answer is now. But the realistic answer is when you can. If you have high debt, the best is to pay down your debt first. The amount you save on the interest on this debt will be more than what an RRSP could pay (unless you are risky and having all your RRSP’s in stocks). If you can afford $25.00 a pay period initially, then you should start with that. Every little bit will help you reach your retirement goal. The average person should retire with at least $500,000.00 in either their RRSP or some form of savings plan. To reach this goal, they would need to contribute a minimum of $10,500.00 per year at age 35. If this number seems daunting, then extend it out and start contributing earlier in life. The best thing to do is to sit down with a financial planner to plan for your retirement. It’s never to soon to start thinking about your financial situation at retirement. At Accountable Value Financial Services, we have lots of connections to Financial Advisers and would be happy to refer you to someone who can help you.
  5. Who can contribute?
    Any individual who works, earns an earned income, and files a Canadian Tax Return can have an RRSP. When you purchase RRSP’s, you purchase them for yourself (you can purchase spousal RRSP’s, which counts towards your annual contribution limit and your tax deduction).

The deadline for contributing to your RRSP’s for the prior year is March 1. You should sit down with your tax professional to see if you should contribute more or less to help your tax situation. You should also sit down with your financial adviser or RRSP specialist to ensure you are on the right track for your retirement.

Accountable Value Financial Services can help with your tax planning. Contact us today to see how we can plan your taxes for the current year and future years. It’s never to early to plan for your future.

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