6 Registered Retirement Savings Plan (RRSP) Myths
1. RRSPs… they’re your only option!
Is it absolutely necessary to invest your savings in an RRSP? Of course not. You should choose the investment vehicle that fits your situation. For example, students who earn a modest income are better off contributing to a TFSA (tax-free savings account) because they won’t benefit from any financial incentive from an RRSP. It’s therefore wiser to wait until the tax deduction becomes more interesting.
For example, Judith, a low-income student, would be better off with a TFSA (Tax-Free Savings Account). An RRSP offers her no tax advantage. She could wait for a higher future income to invest in one and benefit from a more attractive tax deduction.
2. RRSPs don’t pay off!
The truth is, RRSPs are just containers. The returns will depend on how you invest the money in them. Thankfully, you have plenty of options like GICs (guaranteed investment certificate), equities, bonds and investment funds. To know your investor profile as well as which investment vehicles are right for you, speak to a financial security advisor.
3. RRSPs are tax-free!
Here, it’s important not to confuse taxable income and tax-free..
When you contribute to an RRSP, you can deduct this amount from your taxable income. Since income tax, as its name clearly suggests, is calculated based on your income, you will likely pay less in taxes and get a better return. If your employer deducts income tax from your pay, then you’ll get a refund. In fact, people often reinvest their tax refund in their RRSP.
What is tax-free is the income generated by your investments, specifically interest, dividends and capital gains. This is why people say RRSPs are tax-free. The advantage is that you can grow your savings tax-free over a period of 10, 20, even 30 years.
When the time comes to withdraw from your RRSP or close it altogether, that’s when this amount is added to your taxable income. This is why people wait until they retire to cash them in. Since your income at retirement will most likely be less than while you were working, even though you must add this amount to your taxable income, it will still be to your advantage.
4. RRSPs are only for retirement!
Let's not overthink this one! The second R in RRSP is retirement. When RRSPs were created in 1957, their main objective was to allow people to squirrel away money in personal savings plans expressly for retirement.
5. You have to be 71 to cash in your RRSP!
Not exactly! You can cash in your RRSPs anytime after retirement. However, on December 31 of the year you turn 71, you must cash in your RRSPs. You should therefore consider transforming your RRSPs into RRIFs (Registered Retirement Income Fund) or lifetime annuity before this deadline. Speak to your financial security advisor to determine what’s best for you.
6. You have to be 18!
Obviously, the earlier the better, but no need to wait until you’re 18. As long as you’re employed and file a tax return, you can contribute to an RRSP.