Tuesday, January 17, 2023

Retirement is something we should all be thinking about, regardless of your age or where you are in life. A Registered Retirement Savings Plan (RRSP) is a government approved plan created to help you financially prepare for retirement. Your allowable contributions, which change annually, are tax deductible, and the investment gains will be tax-deferred until you begin withdrawing. So, what does that mean? We’ve compiled everything you need to know about RRSPs and why you need to start one today.

What are the benefits of an RRSP

An RRSP allows you to invest money when you can most afford it – during your peak earning years – to build up a comfortable tax-sheltered retirement fund. Since 100% of these earnings can be reinvested and compounded, the growth of your RRSP can increase rapidly over time. Your retirement savings will also increase significantly if you make each RRSP contribution as soon as allowed, for example, early in the year.

Making an RRSP contribution can potentially reduce the amount of tax you will be subject to pay on your income tax return. The CRA will use your RRSP contribution amount to reduce your taxable income for that year. You can also choose to defer claiming your deductions and use them on a future tax return if you suspect an increase in income that will put you into a higher tax bracket. 

Another benefit is that all of your RRSP investment growth is tax-deferred, meaning your investments will compound much faster without the drag of annual taxes, which can be quite significant. The average Canadian family would experience a 15% drag due to capital gains tax and a 30% drag due to the tax on interest payments. Over 40 years this can cut $300,000+ off of your retirement savings. This can easily be avoided by using an RRSP.

Relax, your money won’t be locked in with an RRSP. Withdrawals are permitted before retirement but will be subject to a withholding tax unless being used to fund certain life expenses, such as purchasing your first home through the Home Buyers’ Plan or funding continued education through the Lifelong Learning Plan. These types of withdrawals won’t be taxed as long as you pay them back to your RRSP within the set time period.

Your RRSP account is also protected from creditors. Your RRSP can’t be used to cover liabilities from either a lawsuit or bankruptcy, similarly to a pension. This is what sets RRSPs apart from Tax-Free Savings Accounts and Registered Education Savings Plans, both of which can be seized to cover personal liabilities.

Is an RRSP right for you?

Once you have taxable Canadian “earned income”, even if you’re a non-resident, we suggest contributing regularly to an RRSP. Contributions can be made until the end of the year in which you turn 71 years old. Don’t worry if your income is below the taxable threshold, you should still file a tax return to report your earned income and create RRSP deduction room. The earlier you start, the better – compound interest and upward market trends will be on your side over time. Plus, who doesn’t want their savings to grow faster and tax free?

Ready to be proactive about your financial future?

If setting up an RRSP with YNCU is something on your mind, we have a number of investment options and offer spousal RRSPs. We also offer flexible RRSP loan options to assist you in making your maximum RRSP contribution. Our RRSP loan options include a quick approval process with a flexible repayment plan.

Start looking into a RRSP today! Your future self will thank you.

For all your general financial inquiries and how you can plan out your financial goals, come talk with someone at your YNCU branch!