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Some years ago, the federal government decided to
stimulate long-term savings and help Canadians think about a more
financially secure retirement. They authorized Registered Retirement Savings
Plans. Contributions to the plans, up to a specified limit, are made
tax-deductible and the accumulation inside the plan is also tax-deferred*.
You can put away 18% of your previous year’s earned income to a limit of
$13,500 a year less any pension adjustment plus any unused contribution room
from previous years. This can lower your tax bill two ways: because the
money you put into an RRSP isn’t counted as income and because without that
income you may lower your tax bracket. The money you don’t put away this
year under your contribution limit is rolled over to next year.
Over the years, RRSP regulations have been broadened to the point where you
can invest in many different asset classes: stocks, bonds, money market
funds, mutual funds, annuities, and income trusts among others. The
regulations also allow you to hold foreign securities within an RRSP. At the
present time, 30% of your RRSP’s value can be "foreign content". This can be
an advantage because it allows you to diversify your investments outside Canada and
benefit from worldwide opportunities as Canada accounts for only 3% of the
world's economy.
Any Canadian resident can hold an RRSP, even a student
Any Canadian resident under 69 with RRSP contribution room can hold and
contribute to a Registered Retirement Savings Plan. It makes tremendous
sense to start a plan early in life and contribute to it regularly. While
you can take money out of an RRSP before age 69, when you do it’s taxed as
income. That's why most people just let the accumulations compound, and when
you do the growth can be substantial.
A teenager with a part-time or summer job can open an RRSP and accumulate for
nearly 50 years. A young person just entering the work force can put 45
years worth of contributions into an RRSP. Someone who just begins to think
of retirement and starts an RRSP at 35 still has over 30 years of
accumulation tax-deferred* inside the plan.
Compounding pays and pays and pays
Financial representatives understand very well the idea the longer money compounds,
the greater the results. Compounding is the financial technique of leaving
the monies you earn in the plan, where it can continue to earn you even
more.
Contributing greater amounts later in life cannot make up for the benefit of
an early start. For the same reason, it makes the most sense not to wait
until the end of February of the next year to make your contribution. Make
it as early as possible in the year so as to maximize compounding
opportunities. As an
example, if you were able to contribute in January of this year instead of
waiting until February of next year, your money would have the potential to
grow for an extra 14 months.
More than ever, people need to take charge of their own retirement planning.
The Canada Pension Plan only offers so much. Benefits under company pension
plans aren’t necessarily guaranteed any more. The best way to make sure your
retirement is a financially comfortable one is to put your own money away
now for later.
Your RRSP is not a luxury; you can consider it a necessity.
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