The RRSP in 9 questions… and 9 answers!

We all know that RRSPs are essential to financial health, yet many people remain unsure about the details and intricacies of the Registered Retirement Savings Plan.

To help see things more clearly, here are my answers to questions I’m most frequently asked.

 

Why should I contribute to an RRSP?

There are two main advantages to contributing to an RRSP:

• Contributions are tax-deductible. By reducing taxable income, they offer a credit that you’ll receive in the form of a reduced tax bill or a nice return!
• Savings grow tax-free. It is only when you withdraw your savings that you will have to pay your share to the government.

Image by Gerd Altmann from Pixabay

When should I start contributing to an RRSP?

At 18, it becomes possible for anyone with a salary or business income to contribute more than $2,000 per year to their RRSP.

Of course, the exponential effect of time on savings means that starting early will pay off in the end.

Let’s take an example :

$1,000 is deposited once in an account with a constant annual return of 3%.

• After 20 years: the amount will have generated about $800 in interest.
• After 30 years: the amount will have generated almost double the interest, or $1,500.

That being said, it’s never too late to get started!

 

Is there a limit on contributions?

For 2019, the limit is set at $26,500 or 18% of income.

The unused portion of contributions can be carried forward.

Important reminder: you can contribute for 2019 until March 2, 2020. 

 

My income will increase significantly next year. Does it change anything?

Since the marginal tax rate increases in increments, anticipating a significant change in income can have a considerable impact.

Let’s take an example:

Francis is an employee who earns 100% of his income from his job.

In December 2019, he receives a promotion increasing his annual salary from $34,000 to $75,000. His marginal tax rate will increase from 27.53% to 37.12% in 2020.

A $1,000 contribution to his RRSP for the 2019 fiscal year will give him a tax credit of $275. The same amount applied to 2020 will give him a credit of $371.

It becomes more beneficial for Francis to apply his contribution to 2020.

Image by mohamed Hassan from Pixabay

 

What to choose between an RRSP and a TFSA?

Although several surveys indicate that TFSAs are now more popular than RRSPs, it doesn’t mean that one is better than the other.

When you begin to save, the TFSA is a good tool to build up your safety cushion.

Over time, a strategy combining both types of accounts will generally become more advantageous.

To learn more about the TFSA, read our article here.

 

Should I contribute even if I’m in debt?

It depends on your debt load and the type of financing.

If high-interest credit card debt accumulates in the thousands, a payment plan should be prioritized over savings.

If balances and interest rates are relatively low, an RRSP contribution can be part of your financial planning.

 

What would be a good way to save without having to think about it?

Au automatic transfer taken on payday is an effective way to discipline yourself without much of an effort.

 

Is the RRSP only for retirement?

The HBP (Home Buyers’ Plan) and LLP (Lifelong Learning Plan) allow you to withdraw from your RRSP without penalty, in order to buy a first home or to go back to school.

There are several factors to consider before borrowing funds from your RRSP. In some cases, it could be disadvantageous.

To find out more on the subject, see our article on the HBP.

 

I have a pension plan at work. Is it enough?

Apart from a few rare exceptions, it would be unwise to rely solely on the pension plan offered by your employer.

The optimal approach is to establish a retirement savings strategy that combines the pension fund and the RRSP.

If you have any other questions about planning your retirement savings, don’t hesitate to reach us!