The Young Professional’s Guide to the RRSP

If you’ve ever been in a social situation where the good old RRSP comes up in conversation, and you’re not quite sure what to say – you’re not alone. For starters, you may sit there in silence, perhaps re-evaluating your friend group that’s talkin’ RRSPs on a Friday night. Or, you may be pondering in deep thought, thinking WTF is an RRSP?

If you’re more of the latter, join the club. According to a survey by TD Bank, close to a third of all millennials are uninformed about RRSPs.

Now with all this YOLO-ing catching up from your late teens, RRSP-ing may likely be the next stop on your list of acronyms (with a few in between).

But how do you go from “You Only Live Once” to “Registered Retirement Savings Plans” when you’re not ready to adult yet?

Give it a chance and learn a bit more. It may be cooler than you think 😉

Okay, fine. Tell me more. So what is it, and what’s so good about it?

The Registered Retirement Savings Plan, otherwise known by its nickname – the RRSP, is a savings account designed for retirement.

Boooorrring, you think. But wait, there are a few benefits:

  • The total amount of money you put into your RRSP can be deducted from your gross income when you’re filing your taxes. This will lower the amount that you pay in income tax as a result (You’ll really see the benefit of this once your income is pretty high).
  • The income or investment growth you’ve earned in your RRSP isn’t taxed until you withdraw it. Investment growth is tax sheltered which means more moolah and less taxes (for now)!
  • Flash forward 100 years from now when it’s time to retire: when you withdraw the funds from your RRSP you’ll likely be in a lower tax bracket than right before retirement. Meaning those funds will be taxed at a lower marginal tax rate. But hey, that’s a long ways away.
  • And of course, the potential to get money back when you’re filing your taxes is always a win.

So if you got that paper and you want to see it grow – the sky’s the limit.

The limit? The limit does not exist!

Wrong. There are contribution limits, so don’t expect to ball out on your RRSP now that you know how dope it is.

The limit changes each year, so in 2017, the contribution limit is the lower of:

  • 18% of your income from the previous tax year, or
  • $26,010

So I should buy an RRSP?

Wrong again. Sorry to be anal here – but there’s really no such thing as “buying” an RRSP. An RRSP is an account, in which you can hold investment vehicles. Better lingo? “Should I invest in or buy an investment for my RRSP?” Much better.

And yes. Yes, you most certainly should.

Okay, what can I invest in my RRSP?

When it comes to investment vehicles, you’ve got a few options:

  • Stocks – aka a small part of a company
  • Bonds – giving someone (a company, the government, etc.) a loan / IOU
  • Mutual Funds – where you pay an asset manager to invest your money in a combination of investment vehicles that’s right for you
  • ETFs – an exchange-traded fund, where you hold a combination of investment vehicles that mirror general market performance
  • …and the list goes on!

Verify with your financial institution what instruments you can hold, as there are some exceptions.

RRSPs are meant for a longer term investment (assuming you’re a profesh youngin’) which means you have the ability to take on more risk. Investing in cash or GICs (even bonds), will get you pretty low returns; close to nothing, when compared to what you could make. But these vehicles are less risky – hence the low return. Just remember that you have the ability take on more risk when you’re young – so be open to diversifying your portfolio with riskier investment options and watch that money grow.

I’m gonna be rich – give me the money!

Sorry, but we can’t. Yes, it’s your money, but you’re not allowed to have it until your old. (Pretty much).

The structure of the RRSP has been so tactfully designed, that if you withdraw prior to retirement – you get hit with crazy withholding tax, then the amount is once again taxed based on your marginal tax rate. In other words, try not to withdraw ahead of retirement if you don’t have to. Tax X 2 is so not cool.

Oh, come on! Can’t you give me a free ride?

Well, I suppose. There’s always an exception.The government does offer two ways to withdraw money from your RRSP tax-free.

  1. The Home Buyer’s Plan (HBP): So long as you’re a first home buyer, you can withdraw up to $25,000 out of your RRSP tax-free, in order to purchase your first home. But there’s a catch. You owe the amount you withdrew, back into your RRSP – and you’re required to pay this back within 15 years. And unfortunately since it’s pay-back contribution, you won’t get any tax refunds for it.
  2. The Lifelong Learning Plan (LLP): Craving the nerd life, yet again? Well, if you’re planning on heading back to school, you can withdraw up to $20,000 tax-free. Similar to the HBP, you’ll have to pay this amount back, but in 10 years. And again, no tax refunds.

I’m convinced. How do I get started?

There are several ways to set-up an RRSP. If you’re still learning the basics, your best option is to set-up an account through your bank or financial institution.

If you’re fortunate enough to have a Group RRSP or employer-matching program with your company, don’t wait a second longer to sign up. Always take advantage of matching programs offered through work – whether it’s part of your pension plan, your RRSP, etc. It’s technically free money, and if there’s one thing we’ve all learned in life, it’s to never leave free money on the table.

Is there a “best time” to contribute?

Unlike your once-so-cool velour jumpsuit, the RRSP is in for more than one season. You’ll notice RRSP Campaigns and seasons kick-off in the first 60 days in every calendar year, repeatedly instilling fear in you that it’s your last chance to contribute.

Ignore it, and don’t be scared. The first two months are a great time to contribute with a lump sum IF you weren’t diligent in contributing consistently the calendar year before. If you have your budget set and have allocated your desired amount into your RRSP, no need to give in to the pressure. Follow the contribution room guidelines, set your budget, and you are good to go. Just remember: the sooner you start investing, the more time you give it to grow.

Well, you’ve successfully passed RRSP Basics 101. Now onto your next question, WTF is a TFSA…? 😉

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