Money & Career

Learn the basics of RRSPs

By: Yuki Hayashi

Author: Canadian Living

Money & Career

Learn the basics of RRSPs

By: Yuki Hayashi
Do RRSPs have you scratching your head? Don't worry: You're not alone. Although 68 per cent of Canadians have a Registered Retirement Saving Plan (RRSP), that leaves nearly one-third of Canadian without. Some non-RRSPers choose to plan for retirement in other ways (primarily through employer-sponsored pensions) and others are financially savvy types managing their investments using other vehicles.

But there's also another group who aren't buying in because they think they can't afford it, or they simply have no idea how to get started. If you're in that group, this article is for you.

Why you need an RRSP
Whether you're financially savvy or not – but especially if you're not – RRSPs are a fantastic way to save for retirement. Think of an RRSP account as a lockbox for your savings, only better. Here's why.

• Contributions are tax deductable, bringing down your gross income for income tax purposes.

• Your RRSP is a tax shelter. You don't pay tax on your investment income (until it's withdrawn), meaning the overall value grows much faster.

• You won't be taxed on your RRSP until you make withdrawals, presumably during retirement. It will be taxed as income – most likely at a lower rate since you'll be earning less then as compared to now, your peak earning years.

How do I set up an RRSP account?
You can set up your RRSP through any financial institution: Your bank, credit union, trust or insurance company.

Meet with a personal banking advisor so they can walk you through the process and the different types of RRSPs they offer.

RRSPs are investment portfolios, and returns will vary depending on market conditions. Your RRSP portfolio may contain mutual funds, savings deposits, treasury bills, GICs, equities and/or other options.

Talk with your expert to find the mix that works best for you given your tolerance for risk (and potential reward), as well as whether an individual or spousal RRSP would be best for you.

Page 1 of 2 Do you know how much you should be contributing to your RRSP yearly? Find out on page 2.
How much do I have to contribute?
You can find your individual allowable contribution (i.e., your maximum contribution for the tax year) on the Notice of Assessment you received from Canada Revenue Agency on your previous year's tax return.

In recent years, according to an RBC-commissioned poll, the average annual Canadian contribution was just under $6,000.

$6,000! How do I find that kind of money?
The easiest ways to maximize your contribution is to:

• take out a low-interest RRSP loan from the same financial institution where you open your RRSP account;

• sign up for biweekly or monthly contributions withdrawn directly from your bank account; or

• both of the above.

Who doesn't need an RRSP?
If you're in the lower income brackets (under $30,000) and without prospects for retirement savings over $100,000, it may not be worthwhile to scrounge for money to pay into an RRSP. If you contribute while in a low income tax bracket, then withdraw your funds while also in a low income tax bracket, you won't see any tax savings (unlike a high or middle earner who gets tax breaks by reducing her taxable income while paying in during her peak earning years, and more tax breaks when withdrawing when retired and in a lower income bracket).

After your RRSP matures and is rolled into a Registered Retirement Income Fund, withdrawals will be fully taxable. And if you qualify for the government's Guaranteed Income Supplement for low-income seniors, it may be subject to claw-backs. You may see similar claw backs to social housing, transportation and prescription drug benefits. Chances are the income brought in by the RRSP withdrawals may not make up for the benefits lost. In your case, socking savings away in a bank account is a safer bet.

Bottom line
For everyone else, RRSPs remain a smart idea.

If you're one of the 60 per cent of Canadian workers (and self-employed folks) who don't have a company-sponsored pension plan, RRSPs are an excellent safety net and the most reliable way to ensure you can live comfortably in your golden years.

Page 2 of 2 – On page 1, learn why contributing to an RRSP is a good idea for most Canadians.

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Money & Career

Learn the basics of RRSPs