RRSP 101: How to Max Out Your RRSP
Whether you’re starting your career, a family, or at the peak of your profession, it’s never too early to prepare for retirement. RRSPs are a great choice to help you start saving today so that you can retire comfortably later.
What is an RRSP?
A Registered Retirement Savings Plan (RRSP) is a savings plan designed to help you save money for your retirement years. Your RRSP can hold a variety of investments, including mutual funds, stocks, bonds, and GICs. RRSP contributions reduce your taxable income, which means more cash in your pockets to fund your retirement.
Why an RRSP?
1. Save on taxes
You may have heard friends or family talk about how their RRSP contributions earn them a refund at tax time, and now you want to get in on that action. Contributions are tax-deductible, so you don’t pay taxes on any money you put in, increasing your chances of receiving an income tax refund.
2. Grow your money faster
Since RRSPs are tax-sheltered, you won’t pay any taxes on your investment earnings until you’re ready to use those funds when you retire. Just sit back and watch your investments grow!
Who can contribute to an RRSP and how much?
Anyone until age 71 who earns income is eligible to make contributions to an RRSP. These contributions are capped at 18% of your earned income from the previous year for a maximum of $29,210 for 2022 according to the Government of Canada. If it’s your first time contributing since 1991, chances are you have unused contribution room in your RRSP. That’s great news for you! You can carry forward unused contribution room indefinitely so that you don’t ever miss your chance to contribute.
Can an RRSP help you purchase your first home?
Saving for a down payment can be a daunting task, but government programs are available to help you. With the Home Buyers’ Plan (HBP), first-time homebuyers can withdraw up to $35,000 tax-free from their RRSP to put towards buying their first home. After the purchase, you’ll have 15 years to repay the funds to your RRSP at no tax penalty. So, if you’re in the market for a new home, the Home Buyer’s Plan could be your golden ticket!
Can an RRSP help fund your education?
Thinking about going back to school full-time but the tuition costs have you second-guessing your dreams? An RRSP can help you reach your educational goals. The Lifelong Learning Plan allows you to withdraw up to $10,000 per year for two years from your RRSP to finance full-time education for you, your spouse, or your common-law partner at no tax penalty. Upon completing your education, you’ll have 10 years interest-free to return the money to your RRSP.
How much do I need to contribute?
If you’re working with a smaller income and are concerned that you cannot contribute to your retirement, don’t worry. Contributions can start as low as $25 a month. By starting with small monthly contributions today, you can set yourself up for a more secure retirement later.
Making the most of your contribution room
While you can contribute to your RRSP year-round, contributions made during the first 60 days of the year-end can be deducted during the current tax year. Don’t wait until day 60 – contribute early in the year to take advantage of accumulated interest on your retirement savings.
Here are a few more helpful hacks to max out your RRSP:
1. Take advantage of employer-matched contributions
Many corporations offer RRSP matching plans as a part of their employee benefits. Any RRSP matching offered by your workplace can help you grow your savings over time and max out your contributions– now that’s a win-win! Check in with your HR department today to find how you can start cashing in on this valuable employee benefit.
2. Pay increase? Increase your RRSP Contributions
Receive a raise? Congratulations! While it might be tempting to increase your spending to reflect your new income, choosing to increase your savings will benefit you more long term. So, hold off on purchasing that new tech gadget or pair of shoes, and putt his extra money towards increasing your monthly RRSP contributions instead – you will thank yourself later.
Make a credit union part of your retirement planYou don’t have to make your retirement decisions on your own. Credit unions are a great financial option to help you achieve a financially secure retirement. Not yet a credit union member? Click below to find your nearest credit union.