Registered Retirement Savings Plans (RRSPs) are a relativity basic concept, but sometimes they can seem extremely difficult to understand. A high percentage of Canadians have them and contribute to them on a yearly basis, but we’d bet that while you might have an RRSP you’re probably also having trouble understanding exactly what it is, how it works and why you should have one.
Here is a brief break down of what you should know:
- A RRSP is a way to facilitate long term saving. Think of it as another way to force yourself to save for your retirement.
- Your RRSP simply protects your money from taxes.
- Think of your RRSP as a kind of personal pension plan.
- Since you probably put after tax income into your RRSP, you’ll need to claim your RRSP contributions when you file your income tax return every year. Most people will then receive a tax refund.
- While a RRSP is technically tax free, once you go to take your money out of your account when you retire, you will be taxed.
Ok, so now that you have a basic understand of what a RRSP is, we’ll answer a few of the most commonly asked RRSP related questions. Hopefully this will equip you with the most pertinent information you’ll need to either open a RRSP or take full advantage of the one you already have.
How to Actually Contribute to Your RRSP
If you want to contribute to an RRSP on a regular basis you need to first open up an account with your bank or whatever financial institution you work with. We are happy to report that the act of making contributions is without a doubt the easiest part of the whole process. Since your RRSP is an account, all you need to do it deposit or transfer money into the account.
Probably the most difficult part of the whole process is choosing the investments that your account will hold. Your best bet is to discuss this with your financial advisor as they’ll be able to suggest what types of investments are ideal for you and your money. Also don’t forget to look into whether or not your employer has a RRSP matching program.
When to Contributions to Your RRSP
Alright there are technically two answers to this question. The formal deadline for RRSP contributions is exactly 60 days after the start of the year. That would be March 1st, but for leap years it’s February 29th. This deadline only concerns contributions that you want to deduct on the previous year’s tax return.
But really there is no reason to panic because you can make contributions to your RRSP at any point during the year; you’ll just need to deduct those contributions on the next year’s tax return.
How Much Can You Contribute to Your RRSP?
There is no exact monetary number as everyone’s contribution limit is unique to how much money they earn each year. You can contribute up to 18% of your income from the previous year; this limit can also be affect if you have a pension plan from your employer. The great thing is that your contribution amount carries forward every year, so if you don’t have enough money one year to max out your contributions you don’t have to worry about it, you can simply contribute more the next year.
What Investments Should You Hold With Your RRSP?
Your RRSP is a vehicle through which you can invest, this means that you can technically invest in whatever you please. But of course there are risks associated with investing so it’s up to you. Here are a few of the most common forms of investments:
- Mutual Funds
- ETFs (Exchange Traded Funds)
- GICs (Guaranteed Income Certificates)
- Bonds
- Money market funds
- Individual stocks
If you want your assets to grow you need to purchase investments, simply putting money into your account isn’t enough to see growth. Again this is a personal choice and make sure you discuss it with your financial advisor.
Do You Actually Need a RRSP?
Simply put, if you want to retire at any point in your life you’ll need money to do so, a RRSP will provide this money so yes you probably need a RRSP. The more important question is; do you need one right now? And the answer to that question is, maybe not.
If you’re still very young and don’t make that much money a RRSP is not the best form of savings for you quite yet. For Canadians who make less than $40,000, a TFSA (Tax Free Savings Account) is probably the better choice.
The best thing you can do is to think about what your financial landscape looks like. Do you have high interest credit card debt? Do you have student loans that need to be paid back? Think about what your priorities should be before you decide to contribute.
Don’t Panic, Think and Then Plan
RRSPs can seem extremely intimidating, but they don’t have to be. More often than not it’s the stress associated with money, saving and “the future” that leads the average person into believing they need to open an RRSP before they’ve done any research. You can open up and contribute to a RRSP at any point in the year so take your time and make a plan.
As tax season is upon us, we want to make sure you are aware of any scams that might affect you. Click here to read about a new tax scam that uses the Canada Revenue Agency (CRA) as a ploy to get you to divulge personal and financial information.
