1. Make your golden years more golden: The first and foremost reason to sock money away in an RRSP is to help ensure you have a comfortable retirement. "Being old and poor isn't much fun," says Sheila Walkington, a money coach co-founder of the Women's Financial Learning Centre in Vancouver. "You don't want to get to age 65 and be caught without enough savings."
2. An immediate tax break: When you contribute to an RRSP, you won't pay any tax on that money until you eventually withdraw it (ideally when you are retired and in a lower tax bracket). "Most of us are more motivated by the tax savings than by the retirement benefits because the savings are immediate and we hate paying taxes," says Walkington. How big your tax refund from your RRSP contribution will be come April depends on the tax bracket you are in. The higher your income, the bigger your refund. For example, at a marginal tax rate of 48 per cent, a $5,000 contribution will mean a reduction/refund of taxes of $2,400.
3. Tax-deferred growth: Since contributions are tax sheltered, you don't pay any tax on the income earned (interest, dividends or capital gains) inside an RRSP until you withdraw the funds. Because of this, investments in an RRSP can grow faster than those outside an RRSP, where the income earned is taxed in the year it is earned.
4. The magic of compound interest: The money in your RRSP grows exponentially by continually earning interest on itself. By starting to invest early – and contributing regularly – your returns will grow faster with each passing year.
Page 1 of 2 – Learn how investing in a RRSP can help you buy your first home on Page 2
