Why Everyone Should have an RRSP
A Registered Retirement Savings Plan (RRSP) can be the right choice for everyone. It's one of the best ways to save for retirement, and provides a tax advantage for most Canadians.
If you're not convinced, take a close look at how an RRSP works and what it can do for you. You'll see that not only should you contribute to an RRSP, it's smart to get started as soon as you can. The younger you are when you open an RRSP, the more money you could have by the time you retire.
An RRSP is the only widely available investment vehicle that allows investments to grow untouched by income taxes until they are withdrawn. This makes a huge difference in retirement savings, compared with investing outside a retirement plan.
For example, if you invest $5,000 a year in an RRSP earning 8% annually, you'll end up with $611,729 after 30 years. But if that money is held in fully taxable investments outside an RRSP and you're a middle-to-high wage earner with a combined provincial-federal marginal tax rate of 45%, you'd have just $313,114.
Of course, an RRSP is most advantageous when you make the maximum allowable contribution each year-end as early in the year as possible. For the 2005 tax year you can contribute $16,500 or 18% of the earned income reported on your 2004 income tax return, whichever is less. For the 2006 tax year you can contribute the lesser of $18,000 or 18% of the earned income reported on your 2005 tax return. If you belong to an employer pension plan your contribution room will be reduced.
Now let's consider some of the other advantages of an RRSP:
Tax deductions: The income tax deduction for your annual contribution generates ax savings at your marginal rate. If that rate is below 45%, a $16,500 contribution would reduce your taxes by $7,425. Reinvest the refund in your retirement plan and your money will grow even faster.
Income splitting: Couples can reduce their overall tax burden in retirement. One spouse can use his or her RRSP contribution room to contribute to an RRSP in the name of the other spouse - known as a 'spousal RRSP'. This makes it possible to shift future income from the spouse with a higher tax rate to the partner who has less income and a lower tax rate.
Investment flexibility: Financial institutions offer a wide range of RRSP products that range from mutual funds to specialty fixed-income investments such as GICs. In addition, within self-directed plans, you can hold eligible individual securities such as stocks and bonds.
Easy to invest: You can make a lump-sum RRSP investment every year, but there are many other ways to contribute, including 'in kind' (a contribution of eligible assets you already own), or regular automatic transfers of money from a financial institution account to your RRSP.
Professional services: If you don't want to manage individual investments yourself, you can rely on professionals to do it for you. Invest in mutual funds or set up a professionally managed account with your financial institution or investment dealer.
If you don't have an RRSP - or if you have one but have been ignoring it - speak to your investment representative about getting your retirement savings strategy on track. Contributing to your RRSP as soon as possible or making up for unused contribution room from past years are great ways to fund a comfortable retirement.
- Member CIPF - This article was provided by Brenda Fischer, an investment representative with the financial services firm, Edward Jones. - |
