More than half of young Canadians (aged 19-34) don’t have a RRSP. While a growing segment of the population now does have a registered retirement savings account, there is still a fair amount of misunderstanding on the benefits this type of investment account offers.
The question many have before they think about opening an RRSP is: “When is the best time for me personally to open an account?”
Here, we’ll answer this question while dissecting the nuances of RRSP investment.
Consider Your Current and Future Income
One of the leading benefits of an RRSP is that the income placed within the account is not taxed until it’s withdrawn. Those holding an RRSP account can contribute up to $23,820 of their income into the account per year, as of late 2014. Then this money is usually held until the person reaches the age of 71, at which point they can withdraw the compounded saved money in the account for use throughout their retirement. You can withdraw funds from an RRSP account early, but you may be subject to a greater tax level than when you began the account, thereby nullifying its benefits.
The Lower Your Current Income the Less Benefits Provided by an RRSP
With the taxes on RRSP funds withheld until they’re used, those currently with lower incomes may find little net benefit to withholding their tax payment until retirement. This means that for those whose tax bracket will be the same- or possibly higher- during retirement, purchasing an RRSP at a younger age makes little financial sense.
Consider Your Future Financial Objectives
An important element in the investment selection process is in choosing a product that will help you reach your important financial goals. While most choose to only withdraw their RRSP funds in retirement, the option also might be suitable for those saving for a home or another large investment.
Under Canada’s Home Buyers’ Plan, on certain types of property (which excludes existing homes) a Canadian can use up to $25,000/year from their RRSPs without paying tax on the withdrawn amount.
You then have no more then 15 years to repay this amount to your RRSP with the amount broken down into yearly contributions. If you do not make the required yearly contribution then it will be taxed as income on that year’s tax return.
This means that, if you’re looking to maximize your savings towards home ownership, RRSPs could be a great option at a time when you’re just beginning to approach the savings process.
While many financial advisors will tell you that the best time to open an RRSP is as early as possible in your career, it’s important to weigh all the options before placing a large part of your finances within this one product. Speak with a trusted specialist to find out if RRSPs are the right investment solution for your future goals.
Sources:
http://www.moneysense.ca/columns/setting-up-an-rrsp-for-the-first-time
http://www.moneysense.ca/magazine-archive/maximize-your-rrsp-your-20s-getting-started