When it comes to investing and building your financial literacy - no matter your age - it’s important to understand just how and when you can elevate your finances. Opening a Registered Retirement Savings Plan (RRSP) allows you to benefit both now and in the future by reducing your yearly tax bill while offering you long-term, tax-free growth of your money.
In this blog, we’ll highlight all the need-to-knows about RRSPs, including:
- The purpose of an RRSP
- Who can open one
- The different kinds of RRSPs available to Canadians
- Which RRSP you should choose
- What kind of investments or assets your RRSP can hold
- When you should open an RRSP
- How much money you should contribute per year
To learn more about RRSPs, keep on reading!
What is a Registered Retirement Savings Plan?
Simply put, a Registered Retirement Savings Plan (RRSP) is a government-approved savings and investment account for income-earning Canadians, including the self-employed. Registered through the Canadian federal government, an RRSP is designed for your long-term retirement goals and is similar to 401(k) savings plans in the United States.
Why choose an RRSP?
RRSPs can reduce your yearly taxable income through tax-deductible contributions and allow you to defer paying taxes on your investment earnings until retirement, when individuals are typically in a lower tax bracket.
Who can open an RRSP?
RRSPs are available for all employed Canadians, including those who are self-employed. Although there are no minimum age requirements for opening an RRSP, some financial institutions may require RRSP holders to be the age of majority in their province. Individuals can contribute to their RRSP until they turn 71, as long as they are a Canadian resident who has earned income and filed a tax return.
What sort of RRSPs are available?
Generally speaking, there are three types of RRSPs, and they all have different benefits. The three most common RRSPs are:
- Individual RRSPs
- Spousal/Common-Law RRSPs
- Group RRSPs
Through a self-directed RRSP, individuals have buying and selling powers, allowing them to invest according to their goals. Individual RRSPs can also be open at banks or through advisors, however investment selection may be limited and fees will tend to be higher.
Spousal RRSPs benefit couples, especially when one of the two is a higher earner. Through Spousal RRSPs, a high-earner can contribute in their spouse’s name and received the tax rebate. Distributing your retirement nest egg across both partners should result in lower marginal tax rates for both individuals during retirement.
Though individuals and couples can open RRSPs independently, some employers have started offering group RRSPs. With benefits such as matching employee contributions, l and the ability to automate contributions directly from your paycheque, group RRSPs are highly beneficial and should be considered if they’re an option. If your employer offers a matching program it is in your best interest to maximize the amount they will match.
What investments can my RRSP hold?
Depending on your goals and your life stage your RRSP may look different than your friends or family members. RRSPs can hold a variety of approved investments and assets, including the following:
- ETFs, like the Evermore Retirement ETFs
- Guaranteed Investment Certificates (GICs)
- Mutual Funds
When should I open an RRSP, and how much should I invest?
Investing in your RRSP means investing in your future quality of life. When it comes to investing in an RRSP, a good rule of thumb is to try and contribute at least 10% of your gross income each year. That means if you have a gross income of $80,000/year, you should aim to invest at least $8,000/year in your RRSP. For the 2022 tax year, you can invest up to 18% of your income up to $29,210.
When you make contributions to your RRSP, the tax refund you received will depend on when you make the contribution. For example, for 2022 you can contribute anytime between January 1st, 2022 and March 1st, 2023.
What’s the next step?
Now that you have the basics down, it’s time to get started on your investment journey!
We understand that diving headfirst into the world of investing and RRSPs can be daunting, regardless of if you’re brand new to investing or you’ve done it before. Interested in educating yourself on the nitty gritty details of investing through an RRSP? We’ve got you covered. Download your RRSP vs. TFSA eGuide here.