When and why invest in an RRSP?

Saving money is great, but it isn’t always the best way to achieve your financial goals. Money that just sits in your bank account doesn’t grow. In fact, the interest grows at a much slower rate than the cost of your groceries. An RRSP would no doubt help kick start your savings! Let’s take a look at 6 situations where you would benefit from investing in an RRSP.

1. Saving for your retirement

The Registered Retirement Savings Plan or RRSP is a savings vehicle that’s essentially used to help you plan for your retirement. Starting early in life is ideal, but it’s never too late to start saving.

The amounts you invest in an RRSP reduce your taxable income for the year, which is what you would pay in taxes. As long as the funds remain in the RRSP, the investment amounts are also exempt from tax. You’ll defer the taxes you would pay until the year you withdraw the money.

Take a look at your most recent Canada Revenue Agency notice of assessment where you’ll see the RRSP contribution limit you’re entitled to for your next tax return.

2. Want to buy your first home or go back to school?

You can use the RRSP for your retirement, but also for two other important projects :

  • Buying your first home through the Home Buyer’s Plan (HBP) You can withdraw money from your RRSP through this program and pay it back into your RRSP within 15 years, penalty-free.
  • Going back to school using the Lifelong Learning Plan (LLP) You can use the LLP to finance your education or that of your spouse.

3. Have young children?

Do you receive family allowances for your children? Putting money into your RRSP will reduce the income that’s used to calculate your payments, which may well increase them.

Your contributions could also reduce the cost of childcare for your children, which varies based on your family income. With that in mind, your daycare bills may be reduced because of your investment.

4. You could receive a tax refund

You may be entitled to a tax refund depending on your situation.

In this case, be doubly smart about it : Use this amount to pay off a credit card debt, invest in an RRSP or build a safety net in a TFSA. Your financial security advisor will be able to guide you through these choices and help you come up with the best strategy.

5. In a relationship and your income differs?

Will your partner earn less than you at retirement? Find out if you can contribute to a spousal RRSP to pay less taxes this year, but also when you withdraw the money in the future.

In this situation, the money belongs to your partner and he or she will be taxed when the money is withdrawn. Your retirement income is essentially “split” between you and your partner which is a tax benefit.

6. Nearing retirement?

You already contributed to RRSPs, but you still have unused contribution room? Anyone up to age 71 who still has unused contribution room can invest in an RRSP.

That’s a good thing in itself, because this savings vehicle comes in handy for the next stage of your life : saving money for your retirement.

By continuing to invest, you may receive a tax refund so use it wisely, especially if you haven’t paid off your mortgage or line of credit… So when you’re 55, 60 or 65 years of age, you’ll still be improving your financial prospects.

Speak to your advisor first!

Your advisor can help you on all fronts by devising an investment strategy tailored to your needs. After reviewing your current situation, your advisor will recommend the most effective financial products based on your financial profile and objectives. Reach out to your advisor!