Another tax season has come and gone. The last thing you probably want to talk about right now is anything tax related… but actually right now is the perfect time to get started on building a plan to max out your RRSP for your next tax return.
Over the past few months you’ve likely been bombarded with advertisements about maxing out your RRSPs, but most Canadians know very little about these handy little accounts. Most people will describe RRSPs as a “retirement account”. While this is true, there are multiple ways to save for retirement. Any savings account can, technically, be used as a retirement account, even though it’s not the most efficient way to save. It’s the special features of the RRSP’s “registered” status is what makes it a truly remarkable retirement account.
To clarify, RRSPs are not, themselves, an investment. They are a type of account. Most of your usual investments can be registered as an RRSP (mutual funds, high interest savings accounts, GICs, stocks, and ETFs) as long as your total combined amount within those accounts don’t exceed your RRSP contribution limit.
Now, why should you have RRSP accounts? Here are some highlights of the best features of these types of accounts:
An RRSP won’t eliminate your income taxes, but it will defer them until a later date. When you receive your income, your employer will usually deduct your income tax from your paycheque. When you put money into an RRSP, you get that income tax refunded… for now. Years from now, when you withdraw that money from the RRSP, it will be re-taxed. The beauty of being able to defer your taxes until retirement is that typically people are in a lower income bracket when they’re retired. This means you can get your refund while you’re in a high tax bracket, and get re-taxed at a lower tax bracket. You get to pocket the difference!
The second huge advantage to RRSPs is that your saving will grow in a “tax sheltered environment”. This means that as long as your money is under the umbrella of an RRSP, any growth that happens is protected from the tax man. In a typical savings account, if you earn interest, it has to be reported an income on your tax return and will be taxed. Essentially, you’re getting one dollar in, thirty cents out. At this rate, it’s difficult to build up a solid retirement fund. In an RRSP, however, every dollar that goes it, stay in. Nothing comes out until you withdraw it in retirement. This means that your savings are able to compound at a more rapid pace, which is great!
So next time you’re looking for a way to give your retirement savings a boost, book an appointment and have a chat with your financial advisor. Ask him about setting up an RRSP and take advantage of these beautiful accounts!