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A Beginner’s Guide to RRSPs

February 22, 2018

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As you may already know, March 1, 2018 is this year’s deadline to contribute to your RRSPs for the 2017 tax year in order for them to lower your taxable income on your 2017 tax return. If you aren’t very familiar with RRSPs, or have some questions regarding the topic, keep reading – this post is for you!

RRSPs for Beginners

What is an RRSP?

RRSP stands for Registered Retirement Savings Plan and is the number one most popular way to save for your retirement in Canada. According to a recent study done by CBC News, there are currently just over $1 trillion of Canadians’ money invested in RRSPs, with the next most popular savings method (Tax-free Savings Accounts, or TFSAs) holding approximately $158 billion.

What are the benefits?

Other than the obvious benefit of increased financial comfort throughout your golden years, RRSPs can also provide you with tax savings on your annual income tax return. You can claim tax deductions for any contributions you make to your RRSPs, providing a very attractive incentive for saving, as well as possibly generating a substantial tax return. Many people then take this tax return and re-invest it into their RRSP, ensuring another tax return for the following year while also adding even more wealth to their retirement.

RRSPs also accumulate interest throughout their lifetime at a typical rate between 2% and 8%. This means that if you are 32 years old and begin saving $125 per month at an assumed rate of 4%, by the time you reach 65 years of age you will have accumulated $101,493 in savings. Check out Sunlife Financial’s RRSP calculator here to play around with your numbers.

What are the disadvantages?

While RRSPs are considered a tax-deferral program, they are not a tax-free program. Amounts withdrawn from your RRSP are added to your taxable income for the year, and you may be required to pay more tax on these funds when you file your annual income tax return. This can be especially troublesome if you withdraw prior to retirement when you already have a taxable income, possibly putting you into a higher tax bracket.

If you withdraw funds from your RRSP before you retire, you may be subject to a withholding tax at the time of withdrawal which is usually between five to 30 percent depending on how much you withdraw. This withholding tax, however, can be avoided if you are withdrawing funds from your RRSP as part of the Home Buyers Plan or the Lifelong Learning Plan.

When can I contribute?

You can contribute to an RRSP at any time, although you will reap the most financial benefits if you contribute early in the calendar year (January) and allow your money to accumulate interest beginning as early as possible. The deadline for contributing to your RRSPs in order to utilize them as a tax deduction on your 2017 taxes is March 1, 2018. If you haven’t yet contributed to an RRSP but would like to start, now would be a good time to head into your financial institution and ask them about your options and what packages they offer.

What happens when I retire?

Your RRSPs can stay put until you reach the age of 71. At that time, you are required to start withdrawing your money. Since you are taxed on the withdrawal of the funds, most people opt not to take out the entire sum all at once as this would generate a large tax bill for that tax year. Instead, you would likely transfer the funds into a Registered Retirement Income Fund (RRIF) so that the money can be converted into regular monthly retirement income. There is no penalty or fee for transferring your investment from an RRSP to an RRIF.

Saving for retirement is growing increasingly important as the cost of living jumps higher each year and housing prices soar to levels where Canadians are not sure whether they will be able to retire mortgage free. In today’s economy, we’re beginning to see more and more Canadians heading into retirement with debt and without a plan in place to reduce what they owe. Unfortunately, without increasing the amount you are saving prior to retirement, many of us may not be able to live the lifestyle we want down the road.

If you’ve found yourself struggling to save for retirement or are juggling increasing bill payments each month, Smythe Insolvency is here to help you get back on track. We are trained to work with you to determine the underlying cause of your financial difficulties, as well as assist you in improving your financial management skills, and provide you with effective budgeting strategies to help you achieve your monetary goals.

If you’re ready to start your journey to becoming debt free, contact one of our trusted advisors at your choice of ten convenient locations throughout BC.

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