Are you looking to start saving towards retirement? There’s no better way than an RRSP. RRSP, short for Registered Retirement Savings Plan, is a tax-sheltered account where your money can grow tax-free. Through the power of compound interest, your money will grow a lot faster than any old savings account. When you contribute to your RRSP, you can receive a big, fat juicy refund cheque from the taxman.
The easiest way to open an RRSP is at your local bank branch. Simply set up an appointment, fill out a few forms and you’ll have your very own RRSP! Before you set up your RRSP, it’s important to decide the type of investments you’d like to hold. RRSPs are flexible and can hold a wide variety of investments, including savings accounts, stocks, bonds, mutual funds and GICs. You’ll need to decide the type of investments that’s right for you based on your risk tolerance and time horizon. While an RRSP heavy in stocks has a chance of outperforming one with a heavy weighting in bonds, the tides could quickly turn if we see another crash in the financial markets.
After learning about RRSPs, you’re probably excited to open an account. Before you run down to your bank, it’s important to make sure you’re eligible. To open an RRSP, you must be under 69 years old, have contribution room and file a tax return with the government of Canada. If you’ve worked in Canada your entire life, you should have plenty of RRSP room. You can contribute to your RRSP throughout the year, but you have until 60 days after the start of the year to contribute towards the prior tax year.
Although an RRSP is the right investment for a lot of Canadians, it’s not right for everyone. There are several situations when you may be better off contributing to a TFSA (Tax-Free Savings Account).
By contributing to an RRSP, low-income earners may actually be worse off. Although you’ll enjoy a tax refund for RRSP contributions, you’ll have to withdraw the money eventually. If you’re in a low-income tax bracket, RRSP withdraws can cause claw-backs in government benefits.
The Guaranteed Income Supplement (GIS) is a non-taxable benefit for low-income seniors. If you qualify for GIS, RRSP withdrawals can be the equivalent of a 50 percent tax. For every dollar of income, you lose 50 cents in GIS. For high-income earners, you could actually lose all or a portion of your Old Age Security (OAS), thus it could make sense to utilize both a TFSA and an RRSP.
When you save for retirement with your TFSA, you won't have to worry about losing government benefits you’d otherwise be entitled to. That’s because TFSA withdrawals aren’t counted towards means-tested benefits like GIS and OAS. By saving in your TFSA, you can have your cake and eat it, too.