A common New Year’s resolution is the desire to save more money. Every Canadian with taxable earnings is eligible to put money away in an RRSP, a Registered Retirement Savings Plan, up to a maximum $24,930 per year. January and February are actually the perfect time to put money away in an RRSP, since contributions during these months apply to the previous tax year (in this case, 2015). By contributing now, before the deadline of February 29, you can avoid paying tax on money put in your RRSP, and potentially get a refund simply for contributing.
Why Should I have an RRSP?
But why bother with an RRSP at all? The simple answer is that you should contribute to an RRSP, or other retirement savings plan, so that when you retire you can live comfortably. Though you will likely be eligible for benefits through the CPP (Canada Pension Plan) and OAS (Old Age Security) neither of these will likely provide enough money to support the type of life you would like once you reach retirement.
For example, if you retired this year after paying into CPP for 39 years you would receive $1065 per month, with OAS potentially providing an additional $570 per month. This would add up to $19,620 per year. Even if you qualify for a Guaranteed Income Supplement that does not provide a very large financial cushion, and that is the maximum that you would receive. In order to qualify for the full amount there would have to be no periods in the 39 years where you made very little money or spent time out of the work force.
Traditionally Canadians could rely on workplace pension programs to supplement their retirement income. Unfortunately these plans are becoming more and more rare, with only 37 per cent of men and 40 per cent of women being covered by some sort of registered pension plan in the workplace. This means that statistically you are going to have to rely on your savings to carry you through your retirement.
What Should I Do?
The first step to saving enough for retirement is to have a plan. Just under six million tax-filers contributed to an RRSP in 2013. Though that sounds like a lot, that is only 23.4 per cent of individuals who filed returns.
Though the average contribution was $3,000 very few Canadians contributed the maximum amount to their RRSP (18 per cent of income throughout their working life). This can be contributed to a variety of factors, including the fact that you likely made very little money in your 20s and spent or will spend your 30s and 40s buying a home and raising children. Because of this, many Canadian’s don’t begin to really start saving for retirement until they are in their 50s. Luckily, any contribution room not used in previous years accumulates, so you can end up using it later in life once you earn enough money each year to do so and are no longer saddled with the financial burden of dependent children and mortgage payments. And, since RRSPs are tax sheltered you can use the large amount of accumulated room to reduce the amount of tax you pay and benefit from a welcome tax break.
RRSPs have come under criticism in recent years because your withdrawals (unlike your deposits) are taxable. However, since you will likely move into a lower income bracket once you retire you will be taxed at a lower rate. This can save you money overall, especially if the bulk of your RRSP contributions happen in your late 40s and 50s when you would have paid hefty taxes on the money if you had not deposited it.
The most important reason to have an RRSP is to prepare for your own future. Though it can be hard to plan for the future sometimes when we are busy coping with the present, RRSPs offer advantageous deals for middle class Canadians. Being in the habit of contributing to your RRSP is a way of ensuring that you live well in your later years.
For more financial planning tips and advice contact Tim Lacroix today at 403.648.1541 and visit timlacroix.com