10 RRSP Tips for Beginners

Craig Sebastiano
by Craig Sebastiano January 10, 2017 / No Comments

An RRSP is a great way to start saving for retirement. It’s a type of account you can use to defer your taxes until you retire. But if you don’t know a lot about RRSPs, it’s time to educate yourself.

Here are 10 RRSP tips for beginners:

1. Start saving early

Saving money when you’re younger means you likely won’t need to save as much to reach your financial goals. If you start saving $100 a month when you’re 25, you’ll end up with almost $197,000 in 40 years (assuming a 6% annual rate of return), according to Sun Life Financial. But if you start saving later, you’ll need to save even more to have $197,000 by the time you turn 65:

Starting age Monthly contributions required
35 $195
45 $420
55 $1,175

2. Know how much you can contribute

In order to contribute to an RRSP, you need to have earned income (such as income from employment, a pension, or a rental property). Your limit is 18% of your earned income for the preceding year up to an annual maximum ($25,370 in 2016). You can find your limit on your latest notice of assessment or notice of reassessment, by logging into your Canada Revenue Agency (CRA) account online, or by calling the CRA at 1.800.267.6999.

3. RRSP contribution = tax refund

Contributing to an RRSP will likely result in a tax refund. But that refund shouldn’t be used for a trip or a shopping spree. Instead, you should re-contribute that money into an RRSP or pay down debt. If you want to get a tax refund this year, you need to make an RRSP contribution by March 1, 2017.

4. Determine whether or not you should contribute

Sometimes there are cases when you shouldn’t contribute to an RRSP. For instance, if you’re carrying high-interest credit card debt, you should pay off your debt instead of making an RRSP contribution. Also, if you have a defined benefit pension or a very low income, you’re probably better off contributing to a TFSA instead so you won’t be subjected to Old Age Security clawbacks in retirement.

5. Buy low-cost investments

If you want someone to manage your money for you, you’ll be charged a fee. The fees you pay for owning a mutual fund can often be high but there are low-cost alternatives. The Canadian Couch Potato has a number of model portfolios you can duplicate using mutual funds, index funds, or exchange-traded funds (ETFs). Alternatively, you can use a robo-advisor.

6. Invest globally

Prior to 2005, you weren’t allowed to allocate more than 30% of your RRSP towards foreign investments. But now you can invest as much as want in global stocks and bonds.

7. Make contributions regularly

The best way to save is to make regular contributions. If you automatically put away money every week or month, there’s less of a chance you’ll spend it. Contributing to an RRSP regularly means you likely won’t need to get an RRSP loan.

8. Consider an RRSP loan

In an ideal world, you’ll make regular contributions to your RRSP. But if you can’t, you may want to consider getting an RRSP loan. Before getting a loan, you should look at the interest rate on the loan, determine whether or not you can afford to make the loan payments, and figure out if you should get a loan. If you’re in a low tax bracket, getting a loan might not be worthwhile. Most financial institutions will offer you a loan that needs to be paid back within a year or a catch-up loan that needs to be paid back within five to 10 years. If you do decide to get a loan, you should use your tax refund to pay off your loan quicker.

9. RRSP room carries forward

If you have $9,000 in RRSP contribution room but you only contribute $5,000, the remaining $4,000 in contribution room carries forward. So if you expect to have $6,000 in RRSP contribution room next year, you’ll be able to contribute up to $10,000 ($4,000 + $6,000) in 2017. Your unused contribution room carries forward until you turn age 71.

10. You can’t contribute to an RRSP forever

When you turn 71, you can no longer make contributions to an RRSP. You must convert your RRSP into a registered retirement income fund (RRIF) and begin making withdrawals or use the funds to buy an annuity. You can also do both. There’s also the option to withdraw everything from your RRSP but you’ll have to pay a withholding tax of up to 30%. When you’re close to retirement, it’s best to speak with a financial advisor to find out what the best option is for your situation.

Bonus tip: RRSPs aren’t just for retirement

The federal government allows you to make tax-free withdrawals to buy a home (by using the Home Buyers’ Plan) or to improve your education (by using the Lifelong Learning Plan). This money needs to be re-contributed to your account over a certain period of time or those withdrawals will be considered taxable income. Keep in mind that withdrawing money from your RRSP means your money won’t have as much time to compound and you may need to save even more for retirement. However, you shouldn’t save money for a vacation or a card in an RRSP. Instead, you should use a TFSA.

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Flickr: Alex Vakulenko