Everyone talks about how important it is to establish a registered retirement savings plan (RRSP) - but what steps do you need to take to get one up and running? Here's our primer on setting up your RRSP.
How To Get Started With An RRSP
Setting up your RRSP is as easy as walking into your bank and asking for one - but it's important to know your options first. While banks aggressively advertise their RRSP products around tax time, you could be better off with a smaller lender or credit union, depending on your specific needs - and it's definitely best to set one up early, and not rush into your bank right before the tax deadline!
Remember, your RRSP is not an investment itself - think of it as a box that shelters anything you put inside from being taxed. To get the most out of your RRSP, you should know what kind of investments you'd like to place inside. In addition to high-interest savings, RRSPs can also house:
- Guaranteed Income Certificates (GICs)
- Mutual Funds
- Income Trusts
- Corporate Shares
- Money market funds
If you're not sure how to get started, be sure to talk with a financial advisor about your level of risk tolerance, and what kind of investment is right for you. Then, shop around and compare the best interest rates for those investment types, and pick your RRSP provider based on the rate of return they can provide you.
Ask Your Employer
Some Canadian employers offer RRSP programs that allow you to contribute part of each paycheque directly to your plan. If you're really lucky, your employer may also match your contributions up to a certain percent; so it's always a good idea to ask if this program is available in your workplace.
The downside to workplace-provided RRSP programs is they tend to come with little in terms of advice; you'll often be handed a booklet and told to pick your choice of mutual funds, but it's worth taking advantage and at least max out the contribution amount you need to get matched, and then set up a second RRSP with your own planner separately.
How Much Could You Be Saving?
Even if you start with nothing at all in an RRSP today, putting $500 away for 20 years will lead to more than $208,000 in savings, at a conservative five per cent annual rate of return. Calculate how much you can sock away in your RRSP with this savings calculator.
Understanding The Tax Benefits
However much you invest each year in your RRSP gets deducted from your taxable income. Quick math: if you make $70,000 and invest $5,000, you save roughly $1,500 in taxes that year — the precise amount varies depending on your province.
Because of this tax benefit, the government caps RRSP deductions every year. You can calculate how much contribution space you have (if you don't use it all one year, it carries over to the next year) by contacting the Canada Revenue Agency by phone or going online. Click here for information on determining your RRSP contribution room.
After you set up your RRSP, you don't need to do much. Every February, your financial institution will send you tax receipts to file with your taxes to obtain your refund. You may also be asked if you want to make a top-up at this time, right before the RRSP deadline for the previous year. The deadline usually falls on March 1 (it will be March 2 in 2015). Click here for information on RRSP contribution deadlines.
At least once a year you should meet with your advisor to be sure your investments are making money and that you're putting away enough to help fund your retirement. RRSPs are easy - really!