Let’s talk our favourite acronyms! RRSP

Planning for the future is a key piece to anyone’s financial plan whether that’s 5 years from now or 30 years from now. This post is specifically speaking to the 30 years from now, retirement time!

When it comes to retirement, it’s worth taking into consideration what you want your life to look like and what “annual salary” you will need – how much money will you need every year while you’re in retirement to live the life you want.  

That’s where the Registered Retirement Savings Plan (RRSP) comes in. Along with CPP, it helps meet your retirement needs.

What is a RRSP?

RRSP is a savings plan that is registered with the federal government. The contribution amount is determined on an annual basis using your deduction limit on your earned income. Any unused contribution room is carried over to the following year(s).

One of the most important things to note about the RRSP is that it isn’t an investment – it’s an account where your investments are held. You can decide whether you would prefer to have your RRSP invested in individual stocks, mutual funds or ETFs – or all 3! If you have money in a RRSP, check out what you have it invested in and see if it’s working towards your financial goals!

The other great thing about the RRSP is that it is tax deductible. What does that mean? Tax deductible means that the amount contributed can be deducted from taxable income when filing taxes. This could mean you would be paying less taxes due to a contribution (or better yet, get a return!).

Now, it is worth noting that the RRSP is not tax free, it is tax deferred. This means that you will pay taxes when you withdraw funds. The thought process behind this is that you will be making less money in retirement than you currently are so you will be in a lower tax bracket and the taxes paid will be lower.

Is a RRSP a good fit for you?

There are a few things to consider when deciding whether or not to contribute to a personal RRSP.

1.       Are you already contributing to a RRSP or pension plan through your employer?

2.       How would investing affect your current situation?

3.       Do you need the tax deductible benefits?

Often, if you’re already contribution to an employer pension plan or RRSP, it may be best to begin contributing to a TFSA rather than another RRSP.

Let’s walk through an example.

You are currently making $80,000/year. Your employer has a RRSP where you can contribute up to 10% and your employer can match up to 5%.

You would be contributing $8,000/year on your own to your RRSP (and it’s taken off your cheque before you can even see it, which was usually my favourite). Your employer would contribute an additional $4,000 which becomes an annual contribution of $12,000!

You’ve started working on a budget and you’ve found an additional 10% you want to invest. You’re trying to decide whether it’s best in a RRSP or a TFSA.

If you invest it in a RRSP, you’re contributing roughly 20% of your annual personal earnings to your retirement. If you invest in a TFSA, you have access to these funds on a more short term basis without tax or withholding implications.

Most of these decisions are personal to you and your situation. You may decide that your #1 goal is to max out your annual contributions. You may decide that you don’t want to invest that large of a percentage of your annual pay to retirement and would rather have access to funds without any implications.