Unless you live under a rock, you've probably heard a lot about RRSPs lately. As the March 3 deadline looms, most Canadians are hurrying to figure out their RRSP contributions for 2013. But if you're a millennial, all this RRSP talk might be prompting more questions than answers. And the numbers suggest there are questions.
A 2013 Intuit survey found that 61 per cent of millennials (those born between 1980 and 1995) have a TFSA or RRSP, compared to 77 per cent of Canadians ages 34 and above. Forty-three per cent of millennials report they have an RRSP. For the majority of Canadian millennials, this is a missed opportunity. And even if you are contributing, are you sure you're getting the most out of your RRSPs?
Let's start with the basics: what is a RRSP?
A Registered Retirement Savings Plan (RRSP) is an investment account designed to encourage saving for retirement. And while that seems like a long way away, there are immediate incentives by way of tax benefits. Essentially, RRSPs are tax shelters, which reduce your taxable income, and enable tax-deferred growth.
So what does this all mean, and why should you care?
All RRSP investments grow tax deferred, meaning you only pay taxes on the money invested, including profits, when you make a withdrawal. Since you will theoretically have a lower income in your retirement years, the amount taxed on your withdrawals will be significantly less. All this means more money for you in your golden years.
You also reap a very significant tax credit, since RRSP contributions lower your taxable income. For example, if you make $40,000 and contribute $5,000 to a RRSP, your taxable income will be $35,000. Essentially, RRSPs allow you to keep more of what you earned.
There are many options to choose from when you first invest in an RRSP. Popular choices include mutual funds, guaranteed investment certificates (GICs) and RRSP savings deposits. Setting one up is easy, since most banks and employers offer seamless ways to get started. What's important to know is how much you can actually contribute, which this year is 18 per cent of your 2013 net income, to a maximum of $24,270.
Sound good to you?
Here are some tips to help you get the most out of RRSPs:
Get filing: Not earning much? You should still file your taxes. Even if your returns are small this year, you'll start building up your contribution room for later on when you have more income to invest in a RRSP.
Start small: The average Canadian millennial is saddled with debt thanks to unemployment and rising tuition costs. According to the Canadian Federation of Students, students in Ontario and the Maritimes average over $28,000 in debt. If you're in this position, focus on paying off all your debt first, while putting a small amount into your RRSP. Even $20 per month will grow over time and set you up down the road.
Get a bonus on that bonus: Bonuses are great, but taxes make a huge dent in them. Try contributing your bonus to a RRSP, and you'll reduce the amount that's taxed.
Put yourself in a lower income tax bracket: If you're making above the minimum income bracket, this is your chance to keep your tax rates low. If you can, contribute the difference into your RRSP. You'll pay lower taxes, and have more set aside for the future.
Diversify: There are many investment options when you set up a RRSP; don't waste this opportunity and put all your contributions in one type of investment. Try spreading them out between a more conservative account, like a GIC, and a more risky mutual fund or stock that has higher potential for growth. You tend to have less financial commitments in your 20s and early 30s, like children or a mortgage, so now is the time to take some risks.
Be in it for the long haul: The benefits of a RRSP come with leaving it open until later in life. If you expect you'll need some of your savings sooner, spread you saving between a RRSP and TFSA.
RRSP time doesn't need to be confusing. Consider your situation, investment goals and how you can get the most out of your money. Your future self will thank you.
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