By Cass Schneider
A YOUNGER PERSON’S GUIDE TO RRSPs
Authors note: This is Part 1 of a series on basic money management for younger people.
People my age often put off saving until they are making more money, out of debt or more confident in their job prospects.
As a result, they often don’t realize what they’re missing. It goes well beyond the financial aspects involved.
Over the next few issues, I’ll be discussing some money management basics and how they can change your future for the better.
A Registered Retirement Savings plan (RRSP) is great place to start. You can save money for your retirement but there is so much more that you can do with it.
- You save tax money for every contribution
Your RRSP contributions can be claimed as a tax deduction so that you get a bigger tax return.
eg. You save $1000 in an RSP. You get back the tax you’d normally pay on that money. So, if you’re in a 40% tax bracket, you get back an additional $400.
- Tax free growth
While the money stays in your RRSP, it grows tax free. This allows your savings to compound faster because you’re not paying tax on your earnings every year.
- Get a “paycheque” when you’re retired
When you retire your RRSP can be transferred to a different kind of account (RRIF) which will pay you regularly so you can continue to receive monthly income.
- Use a Spousal RRSP for even greater savings
Make more money than your spouse? It can be beneficial to split your income with a Spousal RRSP so you can both stay in lower tax brackets. Higher income earners get the bigger tax savings now while you both pay lower tax later.
- RRSPs can fund your first home or secondary education.
You can use up to $35,000 out of your RRSP for the down payment of your first house. There’s no need to pay tax on the money as long as you pay it back to the RSP within 15 years. (1/15th every year).
In BC, you qualify for an education tax credit on certain education expenses.
That can offset a portion of the tax you’ll pay when you withdraw the RRSP.
There are significant benefits to start saving when you are young that I haven’t gotten into here. But if you’re just getting going, as little as $25/m will help set you on the right path.
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