Posted on Monday 22 June 2020
This article is part of our Finance Hub.
Whether you’re 25 or 55, we’re all working towards similar goals. That is to pay off all our loans, retire someday, spend a decade or two pursuing hobbies, spending time with family, traveling the globe, or simply living with the luxury of not having to work every day.
It might feel like a heavy ask, but retirement is real and completely achievable—as long as you apply the right financial planning and care, of course. Also the whole idea is to deposit money in your RRSP, and forget it for a while. Don't try to dip into it every now and then. Like if you want to give a valentine's day gift or something. That will defeat the purpose.
There are plenty of different ways and methods to set money aside for retirement, but the key is making sure that you are choosing an approach that will bring maximum saving benefits over time. One of the most popular retirement saving options for Canadians is opening a Registered Retirement Savings Plan (RRSP).
RRSPs have been around since 1957, and are designed to help Canadians efficiently plan for their financial future in retirement. Here’s a quick overview of how RRSPs work:
If taken advantage of correctly, a Registered Retirement Savings Plan is one of the most secure financial decisions you can make for your future. Although it doesn't effect your credit score, an RRSP does lays a nice foundation Here are some of the benefits:
RRSP Contributions Are Tax-Deferred
The words “tax-deferred” should be music to your ears. This means that the government will essentially press the pause button on taxing contributions that you make to your RRSP. You can deduct the money you send to your RRSP from your annual income taxes, meaning you get a little bit of a break during tax season.
Of course, you will eventually need to pay taxes on that money you set aside—and earn—through your RRSP, but you won’t be withdrawing those funds until you are retired. And luckily, at that point, you’ll have a lower income and a subsequently lower tax rate.
As you continue to save, your contributions can be tucked away for decades, growing and earning interest without sending a penny to the government. Making regular contributions in an RRSP can not only help you save for retirement, but it can also save you on your annual tax bill, too—a complete win-win. Then you definitely deserve to celebrate a little on new years. How about every new year eh?
RRSPs Are Great For First-Time Home Buyers
RRSP funds are meant to be set away until you are ready to retire. Generally speaking, if you do choose to withdraw early, you have to file that money on your taxes as income—which means you lose the benefit of tax deferment.
But there is one loophole that may end up being beneficial for some Canadian consumers: the Home Buyers Plan allows first-time home buyers to withdraw up to $35,000 from their RRSP to help finance a home purchase or a new home build.
Think of it as taking out a tax-free loan from your own retirement savings: although it decreases your ability to benefit long-term from compounding interest, you’ll be able to make additional contributions to your RRSP over the next 15 years to “pay” yourself back.
Of course, this is not to say that you should create an RRSP account with the sole purpose of using your funds to buy a house. You’d be better off in getting a TFSA for that purpose, as RRSPs will come with fairly strict guidelines for tax purposes.
It Is Easy To Set Up An RRSP
The good news is that you don’t have to be a financial wizard in order to set up an RRSP. While some financial institutions may have varying requirements, the basics are easy and straightforward:
As far as where to look for the best RRSP, the possibilities are endless. If you have an existing relationship with a bank or credit union, check with them first to see if they offer RRSPs.
If you want to establish a new financial partnership (or are interested in seeing what kinds of RRSP products are available throughout Canada) you can look online. Many financial institutions offer a totally online sign-up process, making for a quicker and more convenient setup.
Whether you choose a brick-and-mortar location or an online institution, make sure to shop around for the best rates and terms to ensure that your retirement savings can grow over time. Saving for retirement is a huge first step toward keeping your financial health as strong as possible over time—and taking out an RRSP is an all-around excellent way to get you there!