The start of a brand-new year is the perfect time to revisit your savings goals and fine tune your personal financial plans.
We all need to be actively saving for retirement, no matter what age or stage of life, whether we’re salaried employees or independent contractors. The trick is understanding how we can maximize our savings and make the most of the funds we’re able to tuck away.
Why you should invest in an RRSP
A Registered Retirement Savings Plan (RRSP) is the government’s way of encouraging you to save for your future. It incentivizes saving twice: first, by giving you a tax deduction on any money you put in, on an annual basis. You pay less in income tax because your RRSP contributions are deductible from your taxable income.
The result? Either a bigger tax refund or a smaller tax bill. Keep in mind that you will indeed pay tax when you withdraw the money at retirement, but that will likely be at a lower rate because your income at that point will be lower.
The second big benefit occurs when you’re ready to retire, as you convert the funds into a steady stream of retirement income. For years your savings and interest will have compounded and grown sheltered from tax.
When to start
As soon as you start earning an income and filing a tax return with the Canada Revenue Agency (CRA), you can begin contributing to an RRSP. The earlier you start, the better, owing to compound interest and upward market trends over time.
Don’t worry about needing to have large amounts of money to sock away. With the Co-operators, you can start saving as little as $50 a month in an RRSP. It’s simply a smart savings plan that you contribute to over the course of your working life.
That said, you’re almost never too old to contribute to your retirement fund so don’t let your age stop you. You can deposit savings to your RRSP until December 31 of the year you turn 71. If you’re in your 40s, 50s and 60s you can still start to save.
When the time finally comes for you to retire, you can convert your RRSP account into a Registered Retirement Income Fund (RRIF) and start to withdraw an income—essentially paying yourself.
Many treat their RRSPs like a regular savings account and simply deposit money, leaving it untouched until retirement. Others choose to invest their money in common RRSP
investment vehicles, such as segregated funds or mutual funds.
Ways you can use your RRSP
For your retirement
RRSP accounts were mainly designed as a way to encourage Canadians to save for their retirements. The fact is that most of us will need savings of our own to supplement our government pensions and an RRSP is a smart way to ensure you’ll have additional retirement income.
The benefits are strongest when you convert your RRSP funds to an RRIF or an annuity. You do this before the end of the calendar year in which you turn 71, though if you retire earlier, you can do this sooner.
To help purchase your first home
You can withdraw from your RRSP without facing the usual tax implications if the money is put towards the purchase of your first home. The RRSP Home Buyer’s Plan is designed to help first-time homebuyers with the down payment required; it allows you to borrow up to $35,000 tax-free. You must repay the amount borrowed to your RRSP in equal increments over a period of 15 years, however, or you risk facing tax penalties.
To continue your education
The other scenario where you can withdraw funds without tax implications is if you are planning to continue your education. The RRSP Lifelong Learning Plan allows you to withdraw up to $10,000 per year to pay for full-time education or training for you or your spouse. You do have to pay these funds back in equal increments over the next 10 years, beginning the year after your first withdrawal.
Important details to remember
There is an important deadline to keep in mind: it’s 60 days past December 31 of each tax year. That means the last day you can make an RRSP contribution to reduce your tax bill for the previous year is March 1—or February 29, during a leap year.
You’ll also want to know the contribution limit. For the 2022 tax year, Canadians can save 18% of their income in an RRSP, up to a maximum of $29,210. If you have any unused contribution room from prior years, it is carried forward—so you may actually be able to tuck more away. You can find out what your individual RRSP contribution limit is for this year from your most recent Notice of Assessment from the CRA.