RRSP 101: What You Need to Know

March 3, 2014; you’ve probably seen the signs, heard the commercials, and overheard colleagues talking about it. It’s the RRSP deadline. 18% of your income up to a maximum of $23,820 can be placed into designated accounts and funds to help lower the amount of taxes you owe. What is an RRSP? Does it make sense to put money into one? What should it be invested in and what is all the hype about? 

First, let’s take a step back and explain what an RRSP is. A Registered Retirement Savings Plan (RRSP) was first introduced in 1957 by the Canadian government as a way to promote saving for retirement.  The concept is that a person can contribute a portion of their income into an approved account, earn interest, and won’t have to pay taxes on the money until it’s taken out during retirement or when they turn 71.

While an RRSP is highly promoted as a tax shelter for part of your income (which it is), the more important component is how it can help Canadians save for the later years of life. A recent study by BMO revealed the average citizen feels they will need $906,000 to have a retirement in which they won’t have to lower their standard of living. If you’re a wealthy Canadian, that number jumps to an average of $2.3 million to enjoy the same current lifestyle. While accumulating this kind of money may seem like a daunting task, starting to save early and having a solid financial plan can significantly help get you there.

There are times when it may not make sense to put savings into an RRSP. An example of this is when someone is in the lowest tax bracket. The tax break realized won’t be significant and you may be better off saving the room (what you don’t contribute in one year can be carried forward) for when you are in a higher bracket. Another reason to not contribute would be if someone has credit card debt and paying down the balance is more beneficial to them. A third example may be someone that already has accumulated a significant amount for retirement and is carrying a large mortgage. Using the money to pay down the mortgage may carry a higher benefit than the tax savings. While these are just a few examples, every individual is different and should consult with an expert before making any decisions. 

Although the deadline for 2013 contributions is coming up at the beginning of March, the best habit and strategy for most investors is to deposit money into their RRSP at regular intervals throughout the year.  An auto-transfer set up through your bank will divert money over at amounts and intervals of your choice and ensure you’re setting money aside for the future. Doing this is a great way to eliminate having to remember to transfer the money or having other expenses eat away at the capital. In general, leaving something to the last second isn’t a winning strategy for most people. By consistently setting money aside, you’re going to help yourself greatly later in life as well as avoid some effects of the ups and downs in the market.

Your options of different funds and products to invest in vary greatly. In recent years, people have begun to feel frustrated with mutual funds due to their high annual fees and below average returns.  Products like the Mortgage Syndication provide the benefits of investing in real estate without having to become a landlord and manage tenants. The returns are generally above what most people have typically seen the last number of years (usually 8%) and are fixed, which means they stay the same each year. This product continues to gain popularity as investors search out better performing and more secure investment options.  

The purpose of this article is designed to teach you some basic fundamentals about the RRSP and how it can be a great tool to help accumulate money for the golden years. Remember, at the end of the day this is your hard earned money that nobody will care about it as much as you. You should always feel comfortable and know all the risks and benefits. Do your homework, perform your due diligence, and always feel confident with any investment you decide to make.    

#LYNL | Live Your Notable Life

Cover image from: medicalcpa.ca

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Article by MP Private Capital Founder Mitch Parkermitch