10 reasons to fall in love with RRSPs

February is the month of Valentine’s Day and romance, but it’s also a good time to show some love to your future self by contributing to your RRSP! 

Friendly reminder : March 1st is the deadline to contribute to your RRSP for 2020. So perhaps a date with your financial advisor should be on your schedule.

Still not convinced? Then let’s review all the reasons to be in love with the RRSP.

 

1- It rewards procrastination

Procrastination is rarely desirable, but it comes to paying taxes, it’s better to procrastinate. And that’s mainly why we love RRSPs!

In the short term, it reduces your taxable income, which translates into a tax refund or a lower tax bill.

By deferring taxes on capital gains, dividends and interest, it also reduces the total amount you’ll give to governments over your lifetime.

The logic is simple: your earnings throughout your career are likely to be higher than when you’ll be retirer. Because you will report less income at the later stage of your life, your withdrawals at that time will be taxed at a lower rate.

 

2- It adapts to your needs

With the RRSP, it’s possible to satisfy risk takers and more cautious investors.

With a few exceptions, such as commodity futures contracts and personal property such as works of art and antiques, RRSPs allow you to invest in virtually any type of investment.

It’s very wrong to think that RRSPs are primarily designed for cushy investments.

 

3- It gives you the freedom to choose and evolve over time

By providing access to a multitude of investments, it allows you to adapt your savings strategy over time.

Within your RRSP, you can have stocks, bonds, treasury bills, guaranteed investment certificates, mutual funds (those that qualify only), exchange traded funds (ETFs), income trusts and even mortgage-backed securities, as well as gold and silver.

 

4- It allows you to build little by little

Since the concept of long term is ingrained in its DNA, the RRSP favours a more optimal approach to investing for the common investor.

Contributing to an RRSP leads us to think in the long term. The drastic drop in the stock market indexes last March, followed by an impressive rebound afterward, has shown once again how better it is to look far ahead and not worry at every market jolt.

 

5- It gets along well with the TFSA

TFSAs and RRSPs are often wrongly cast as competitors as if a winner had to be decided between these two opponents. Instead, they should be seen as accomplices who can work together to help you achieve well-balanced financial health.

Any worker or business owner going through an asset-building phase should have both. On the one hand, the TFSA is a good place to keep an emergency fund, and on the other, the RRSP ensures a quiet retirement.

The calibration between the RRSP and TFSA is primarily a tax matter in the end. Since the optimal allocation varies from person to person, it’s the kind of thing a good advisor should take the time to discuss with you.

 

6- It always gives you a chance to get back on track

If you are unable to contribute to the RRSP for one or more years, you can carry forward your unused contributions to future years. By the way, your unused contribution room is posted on your Notice of Assessment from the Canada Revenue Agency and on your online profile.

The limit for 2020 is $27,230 or 18% of your salary. Remember that the contribution deadline for 2020 is March 1, 2021.

 

7- It finds ways to make your life easier

If you’re the type of person who easily “forgets” to save, you can schedule automatic payments on your payday. This way, you can plan your budget without having to think about saving any of it.

 

8- It can help you become a homeowner

With the Home Buyers’ Plan (HBP), you can accumulate a down payment for a first home while saving for retirement. To find out more about the HBP, check out our article “HBP: How to Use the Home Buyers’ Plan”.

 

9- It supports you if you want to return to school

Similar to the HBP, the Lifelong Learning Plan (LLP) allows you to withdraw amounts from your RRSP to finance training or higher education. Consult your MCB Group financial advisor or the CRA website for more details.

 

10- It could make you a millionaire

With the ever-increasing cost of living, reaching a million in savings is no longer as spectacular as it once was, but it’s still a very solid cushion to fall back on.

For the vast majority of employees and self-employed workers, RRSPs are simply the safest and most optimal way to save such a large amount over many years.

Assuming a constant return of 5%, a contribution of $15,000 per year for 30 years will allow you to surpass the one million mark in retirement savings. This is more than double the amount invested ($450,000).

So, confinement or not, we wish you a happy Valentine’s Day and a big RRSP contribution!

If you have any other questions about planning your retirement savings, don’t hesitate to ge tin touch with an advisor at MCB Group.