Building up savings on a modest budget isn’t easy. If you’re at the beginning of your working life and juggling an entry-level salary, student debt, and the high cost of living, planning decades ahead for retirement feels like a tall order. But whatever the future holds, you need to save for it.
A registered retirement savings plan (RRSP) is essentially a savings account with tax deferral benefits. Throughout your working life (particularly during the high-earning prime of your career), you can contribute tax-deductible money to your RRSP. As long as it stays in the account, any investment income earned is also tax exempt. The money is taxed upon withdrawal, ideally when you’re retired and in a lower tax bracket.
For the 2017 tax year, you can contribute up to 18% of your income up to a maximum of $26,010. The beginning of the year is dubbed “RRSP season” as people scramble to contribute ahead of the March 1, 2018 deadline (and banks try to sell you related products), but it’s best to make a plan and save throughout the year. If you’re a newbie to RRSPs (or saving in general), here are three creative ways to help maximize your contributions.
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Pay yourself first by automating your savings
Depending on how early you start saving, it’s recommended you contribute about at least 10-12% of your pre-tax income to an RRSP. The single easiest way to do this is by putting your savings on autopilot. You can set up automatic transfers through your bank account, or directly through payroll deduction. When your savings are automatic, you won’t touch what you don’t see. If your finances are tight, start by saving 10% of your income and work your way up to the maximum allowable contribution.
There are two ways to claim your RRSP deductions. First, you can file your yearly taxes as usual and wait to receive your refund. However, if you’re enrolled in an automatic savings plan through your workplace, you can file a T1213 form with the Canada Revenue Agency (aka the taxman) to have your employer make the necessary tax adjustments at source. This means less income tax will be deducted from your paycheque. Instead of one big tax refund in the spring, the tax savings will be spread out over the year and can be reinvested sooner.
Squirrel away bonuses
Along with regular contributions from your paycheque, at least a portion of any extra money acquired throughout the year should be diverted to your RRSP, tax-free savings account (TFSA), or high interest savings account. This includes a salary raise, cash bonus, tax refund, inheritance or family gift, or even cash-back credit card rewards. Expected or not, don’t factor these windfalls into your core budget or spend the money before you actually have it. Think of National Lampoon’s Christmas Vacation, where Clark Griswold pays a hefty advance to install a backyard pool, only to have his year-end bonus fall through — remember the Jelly of the Month Club? Don’t be Clark Griswold. With a savings plan in place, you’re less likely to be impulsive.
Save the difference
You should check the balance of your RRSP (and any other savings accounts) regularly. Every time your balance gets within $10 of the next $100, top up the sum. So if your balance is sitting at $3,492, contribute $8 to make it an even $4,000. Like the pickle jar full of pennies in your childhood bedroom, this piecemeal saving strategy won’t make you rich. However, there’s an undeniable psychological satisfaction in reaching a beautiful round number. As you continue to trudge along toward your financial goals, hopefully it’ll give you a little confidence boost.