For most people, funding retirement is one of their biggest financial goals, and the Registered Retirement Savings Plan (RRSP) is a popular vehicle for saving. Since 1957, the RRSP has been an effective way for Canadians to put away money for their retirement while deferring taxes.
An RRSP allows you to contribute a certain amount each year to your plan. This contribution qualifies for an immediate tax deduction as it lowers your taxable income, so you pay less tax on that year’s return. For example, if you contribute $5,000 to your RRSP, then your taxable income is reduced by $5,000.
Your RRSP contribution limit depends on how much employment income you earn, how much you have contributed to your RRSP in previous years and any amounts contributed into your employer-sponsored pension plan. After you file your annual income tax return, Canada Revenue Agency issues a Notice of Assessment that states your RRSP contribution limit for the subsequent tax year.
Primary benefits of RRSPs
Here are five compelling reasons why you should contribute to an RRSP:
- Tax-deferred growth. If your investments generate income such as interest, dividends or capital gains, you will not be required to pay tax immediately. Instead, you will only start being taxed when you begin withdrawing your money, which should benefit you (see point #4)
- Flexibility. RRSPs can hold a variety of qualifying securities, such as mutual funds, bonds, stocks and more. You can choose the mutual funds, stocks, etc. that best suit your personal risk tolerance and investment objectives
- Building a retirement portfolio. You want to have enough money to match your needs and desired lifestyle in retirement. RRSPs are especially important if you have no company pension plan
- Deferring taxes to your retirement years. Typically, you will be in a lower tax bracket relative to your working years, so the amount of tax you pay on your retirement savings should be less as well
- Addresses different needs. You can use the savings from your tax deduction to invest and grow your wealth, or meet other current needs. RRSPs also help you meet your long-term financial goals
The case for consolidating RRSPs
If you hold RRSPs in different financial institutions, it may benefit you to consolidate those plans. Consolidating your RRSPs can save you time and effort because you don’t need to track your retirement savings across institutions. Instead of being issued different reports from several companies and trying to make sense of them, you will receive one convenient, comprehensive statement that lists all of your investments and plan activity at a glance.
Consolidation could also save you on investment fees and, potentially, some service charges by keeping your plans at one institution. Lastly, if you consolidate your retirement plans, you can benefit from a personalized, integrated, diversified investment strategy that may help maximize the growth of your retirement savings.
Strategies to grow your RRSP
There are many things we can do to help you better accumulate savings for retirement. I’d be happy to discuss them with you, but for now here are three practical tips:
- Contribute the most you can. Even if you cannot make the maximum annual contribution, every dollar you invest in your RRSP will get you closer to achieving your retirement goals
- Start contributing early in life. The power of compound growth means that contributing to an RRSP as early as possible – and making it a regular habit – will help you save more for retirement
- Time your contributions wisely. Proven RRSP strategies include: making your contributions early in the year to allow for greater tax-deferred growth; or making monthly contributions to keep a strong savings discipline and help you benefit from dollar-cost averaging
It’s important to save for retirement so you can enjoy your post-working years and not worry about outliving your money. Contact our office to discuss the benefits of RRSPs and how you can make the most of your retirement plan.
Disclaimer: This is for information purposes only and should not be construed as investment advice, investment decisions, products or services, offer in any jurisdiction in which such solicitation or offer would be unlawful. Please consult your own tax planning advisor.