Now that March 1 has come and gone, the RRSP March Madness has finally subsided. I’m talking about the onslaught of signs caps-lock yelling at you YOU THAT YOU NEED TO PUT MONEY IN YOUR RRSP NOW. Like so:
Some of you might have thrown extra dollars at your RRSP somewhere around February 27th, because that’s what you were supposed to do?!
Some of you might have let March 1 come and go without a second thought about your retirement savings.
Some of you definitely don’t have an RRSP, and might be thinking: Ugh am I supposed to have one of those by now?
So glad you asked.
For your sake, I am not going to fully answer this question all in one post. This post is meant to give you a crash course on the basics of RRSPs- what they are and why they are great. The next two weeks will help you sort out the difference between an RRSP and a TFSA, and whether you should have both, one, or neither!
But first things first:
What is an RRSP?
A Registered Retirement Savings Plan (RRSP) is a super-fun account that you deposit your money into…then you cannot should not touch it again until you turn 65.
Not touching your money for the next forty years sounds awesome, amiright?
I know, I know. It’s not the most fun or sexy place to put your money. I definitely spent my 20s pretending RRSPs didn’t exist. Please. Retirement? I have all the years to save for that. I did not open one of these bad boys until I was 29, and that was through work, which means somebody pretty much forced me into opening the account.
But more so than a lot of other things in life, I wish I had opened that RRSP way way sooner. Because they are actually kind of awesome.
Some need-to-know things about RRSPs:
They can do all kinds of things with your money!
No matter what you want to do with your money, you can do it within an RRSP. Think of your RRSP like a pint glass. You can fill that pint glass with a local-brewed organic lager or an amber ale. Your first drink might be a dark chocolaty stout, then you might want a hoppy IPA. The beer analogy is pretty weak, but is anybody else ready for patio season?
Your RRSP is just the vessel (ie. pint glass). Inside it, you can hold whatever kind of investments (ie. delicious, frothy beer) you want: mutual funds, stocks, bonds, GICS, or exchange-traded funds (ETFs).
If you are not risky, that’s cool. If you are totally okay with seeing your money go up and down, that’s cool too. You have total control over how you invest your money in your RRSP. I promise, even the investing part is super easy and not intimidating.
They are tax-deferred!
Who loves getting out of taxes? Cause yea, the money you put into an RRSP does not get taxed. Sweet. Let’s say you make $50,000 a year and you want to save about 10% of your income: $5,000. For an Ontario resident, you would normally lose about $1,435 of that to taxes, leaving you with only $3,565 to save or invest.
If you decide to put that cash in an RRSP – ALL the money goes into the RRSP. If you already paid income tax on those earnings, you will get that nice juicy refund of $1435-ish come tax season. That is why everyone makes a big deal about contributing before March 1st – because then you can claim that contribution on your tax return for that year. Anything after March 1 will count as a contribution for the following year.
Another fun fact: you normally have to pay tax when your investments make money. Let’s say you buy shares of a stock, the stock goes up, and you then sell those shares and earn money from the sale. You normally need to pay tax on those capital gains. In an RRSP, you don’t.
You do have to pay taxes on money when you finally withdraw it from your RRSP but if you play your cards right, your money will have had about forty years to exponentially grow itself before you get dinged with those taxes.
They actually do let you take the money out early!
Exclamation mark aside, do not get too excited about this one. I think one of the greatest assets of an RRSP is that the money is hard to reach. The whole point is that you should not be spending these dollars now. Remember how future you is still going to need to have electricity and pay taxes and stuff? You need money for those things. And I freaking love electricity. But here are the circumstances under which you can withdraw money from your RRSP early:
Home Buyer’s Plan (HBP) – If you are buying your first home (or have not owned for 5+ years), you can withdraw up to $25,000 from your RRSP for a down payment. Then you have 15 years to gradually pay it back into your RRSP.
Lifelong Learning Plan (LLP) – Similar deal. If you go back to school, you can withdraw up to 10,000 a year for two years to cover your expenses. You have to meet certain criteria such as being a full-time student, and you would have ten years to pay back it back in equal instalments.
All Other Life Things – Just. Don’t. You will pay a hefty withdrawal tax between 10-30% on any withdrawals that do not fall under the HBP or LLP. Bonus: you are not allowed to re-contribute this money down the road. Once you take it out, you lose that contribution room forever. If paying for your wedding with a fat RRSP withdrawal seemed like a good idea, I can pretty much promise you that it is an awful idea.
If you need to take money out of your RRSP to pay for something, it means you cannot afford that thing.
That’s okay. But instead of decimating your retirement savings, you should start saving for that thing you want.
They let you put in up to 18% of your annual income!
You can contribute as much as 18% of your total income up to a limit of $25,270 in 2016. Tax break on 18% of your income? Yussss. What this means is that the RRSP makes a buttload of sense for high-income earners. If you are somewhere at the low to mid-salary range, an RRSP might still be awesome but it can take a bit more work to figure out if it’s your best option.
What if you have never opened an RRSP before, but you have been working for like a decade? Contribution room rolls forward every year. Yep, I totally got RRSP contribution room from working at the smoothie shop at the mall in high school. And it has carried over every year since 2003. Who knew?
No idea how much room you have in your RRSP? I didn’t either but then I signed up for an online account with the Canada Revenue Agency (CRA) and my life has been significantly more amazing ever since. You can check your RRSP and TFSA contribution room, the status of your tax return and notice of assessment, and if/when you will receive other tax credits. This handy infographic will walk you through the sign-up process: http://www.cra-arc.gc.ca/esrvc-srvce/tx/psssrvcs/gtnln/nfgrphc1-eng.html
That is my very bare bones crash course in RRSPs. I know I have totally sold you on them and you cannot wait to go open an RRSP online right now, but hold up. Does everybody actually need one of these accounts?
It’s a good question.
They have their perks, no doubt. But for some, it might actually make more sense to funnel your money into a Tax-Free Savings Account (TFSA). I am going to delve into the TFSA next week and offer more background to help you decide where your money should be going.
If you do not have a retirement fund through work and you are looking to open an RRSP ASAP, my personal favourite for investment accounts is Wealthsimple. If you do have a pension plan through work, go with whatever they are using, especially if you are getting an employer match (I turned down free pension money from an employer once, and it has sucked ever since). Another bonus of going through work is that you tend to get pretty rad discounts on management fees compared to normal mutual funds.
If you are super psyched about RRSPs and you just can’t wait to get started, you can open one online in about 15 minutes. Even if it is not the perfect investment vehicle for you and your individual circumstances, I am a big believer in just getting started. Go for it. Open it. Start transferring $20 or $50 a month into it. I can pretty much guarantee you will never regret opening a retirement account.
How are you doing with your retirement savings? Let me know in the comments!