RRSPs: Are they Worth it?
With all the chatter concerning other tax-saving accounts and their lucrative features, it’s hard to stop and think about Registered Retirement Savings Plan or RRSPs. In fact, RRSPs sound like yesterday’s news to most people. But given that retirement age is creeping in fast for many people, there’s no time to waste into retirement programs that don’t give maximum returns.
RRSPs were created to present tax-saving opportunities to individual Canadians. And even today, they are considered the most effective way to save for retirement.
What is an RRSP?
RRSPs are an investment account specifically designed for Canadians who want a secure retirement. Their main benefit is the tax advantage they give to individuals as opposed to other retirement investment options.
The contributions, which can be made within a set limit are tax-free, and will be compounded without the investor having to pay taxes on those gains.
RRSPs are accounts that hold other investments, like a portfolio. This can be compared to opening a regular brokerage account. You cannot purchase an RRSP account. Instead, you purchase an investment in the RRSP. This is something that must be clarified since it’s a common misconception among most Canadians.
Some typical features that come with these accounts are:
(a) They are registered with the Canadian federal government.
(b) Unlike regular investment accounts, RRSPs offer massive tax advantages.
(c) RRSPs can hold several types of investments.
(d) They are categorized as a Trust.
The advantages of opening a RRSP account
When the government refrains from taxing Canadians, it encourages a culture of saving for retirement. But they are not doing this out of generosity. Instead, the government reckons that the cost of sustaining the elderly is high, and by encouraging early retirement savings, they would save a great deal of resources.
An RRSP account will accrue profits from interests, capital gains or dividends. However, this profit won’t be taxed immediately as income. There’s a difference between ”tax-free” and ”tax-deferred.” In the case of RRSP investors, they will only pay tax when the profits have been withdrawn.
Nevertheless, tax deferrals remain profitable because income tends to remain low during the retirement age as compared to during the prime earning years.
This means that your taxable income will be determined by the amount you contribute, and this is restricted to a certain limit.
In other words, there’s a capped limit within which a person can invest their annual income. For instance, if you earn $34,000 in 2015, the government will let you contribute 18% of that income. This translates to $22,000 in RRSP investment for 2015.
If you invest early in your life, it will give your money enough time to multiply, thus helping you meet your future financial goals. That’s the reason RRSP investments are designed to grow through compound interest.
Again, if you fail to use up the limit of your contribution in any given year, your unused contribution will be deferred indefinitely, and this allows you to catch up on contributions in case you failed to save the maximum amount in a given year.
RRSPs are totally worth it. The sooner you start investing in RRSPs, the more time you will give your investments to compound. The additional time may mean all the difference when it comes to achieving a big boost in your retirement money. For more information, contact the experts at McDougall Insurance today.