Given the amount of information we read each week, it’s easy to become overwhelmed and have trouble separating fact from fiction. That’s certainly true when it comes to RRSPs. There are a number of popular beliefs about the subject, which are not strictly true. Here are six preconceived ideas about registered retirement savings plans.
1. You have to start contributing to an RRSP as early as possible.
While it’s in your interest to start saving early, “saving” doesn’t necessarily mean putting money into an RRSP. Depending on your situation, it might be more advantageous for your to start contributing to a TFSA (Tax-Free Savings Account), especially if your earned income is not high enough to be taxable (e.g. if you’re a student). The contribution room can then be used at some time in the future, when your tax deduction is higher.
2. RRSPs give low returns.
An RRSP may not be profitable, in and of itself, because it is only an investment vehicle. You could compare it to a container marked “registered for tax purposes,” in which investments have been placed and which has been closed with a lid to protect any profit from tax. It’s the choice of investments that will determine whether or not the returns are guaranteed. Contact your financial security advisor to determine your investor profile and the type of investments that would work best for you.
3. RRSPs are useless, because you have to pay tax when you make a withdrawal.
By investing in an RRSP, you reduce your taxable income, so you pay lower income tax. It’s when you withdraw money from your RRSP that it is added to your income and taxed. For that reason, it’s often more beneficial to withdraw from your RRSP when you retire, because your income is usually lower, as is the tax rate. The advantage to doing it then is that the savings grows more quickly while being sheltered from taxes.
4. RRSPs are only good for retirement.
Although its primary use is saving for retirement, an RRSP can also be used for other life events. You could take advantage of the Home Buyers’ Plan (HBP) to facilitate the purchase of your first home or the Lifelong Learning Plan (LLP), which allows you to withdraw amounts from your RRSP to finance your studies, while still saving for retirement!
5. You have to make a minimum contribution.
False. There is no minimum contribution requirement. The important thing is to decide on an amount that will enable you to achieve your personal savings goals. However, you may find it easier to put money aside regularly than to contribute a larger amount at the end of the year.
6. You have to be 18 to contribute to an RRSP.
Contrary to the TFSA, there is no requirement to be 18 or more to contribute to an RRSP. As soon as you start working and filing income tax returns, your RRSP contribution room starts growing. You can use it as of the first year or whenever your income is high enough to enable you to take advantage of all of its benefits!
To get the facts about RRSPs, there’s nothing better than a consultation with a financial security advisor. The guidance you receive will help you make the right choices based on your personal situation and your needs.