Why Should You Invest in RRSP This Tax Season?
The Registered Retirement Savings Plan, or the RRSP, lets you save money over your lifetime by giving you tax benefits.
The two key benefits of RRSP are:
- The amount that you contribute to RRSP can be deducted from your taxable income. This entitles you to a tax refund.
- The interest that you earn in your RRSP is not taxed as long as it stays in your RRSP.
- Unused contributions can also be carried forward year after year.
Why should you start investing in RRSP?
Anyone who wants to reduce their tax bill and wants to build up a corpus for retirement should start investing in RRSP. Anyone under the age of 71, earning employment income can also contribute to RRSP.
When should you start investing in RRSP?
You should start as soon as possible. The earlier you start, the more you earn returns on your investment.
You can contribute till the age of 71. There’s technically no minimum age requirement for contributing to RRSP – a guardian can create RRSP for a minor. However, you must be at least 18 to contribute over $2,000 a year to the RRSP.
Common RRSP FAQs
- What is the impact of RRSP on my tax refund?
The main advantage of RRSP is that it helps you save taxes. This means that investing in RRSP allows you to deduct your RRSP contribution from your current income, thus reducing your taxable income.
Therefore, by withdrawing this money upon retirement, you will pay less tax than what you would have before, as your tax rate should be considerably lower at retirement than when you were working. Meanwhile, the money in your RRSP grows tax-free.
- What is the advantage of RRSP over a TFSA?
A TFSA is a tax-free savings account, which means it allows you to save money tax-free. When you withdraw, you will not be entitled to pay taxes. Unlike RRSP, contributions made to a tax-free savings account are not tax deductible.
Because it saves you money tax-free, a TFSA can be your best option for short term projects, like saving money for a new car or a trip. The RRSP, on the other hand, is more suited towards long-term savings.
- How much should I contribute per year?
It depends. People can contribute to a certain limit. You are allowed to invest up to 18% of your eligible income or according to the limit set by the government.
Contact a Trust Life financial advisor to know how much you should contribute based on your budget. Everyone has different savings goals as well as needs.
- When can I withdraw money from an RRSP? Can I do it whenever I want?
You can withdraw money from your RRSP at any time, not just when you retire. However, if you withdraw before your retirement, the tax that was not deducted before will be deducted from your contribution. The amounts withdrawn will be added to your annual income, which could increase your taxes.
A word of advice, wait until you retire to withdraw money from your RRSP. However, if you want to save money for a short-term project, it would be better to contribute to a TFSA.