RRSP’s Helping You Stay On Track With
Your Retirement Budget
RRSP’s Helping You Stay On Track With Your Retirement Budget
For many people living in Canada, thinking about retirement isn’t always top of mind. They’re busy working and living life, but tend to put retirement thoughts on the shelf for later. Sure, they may hear about a Registered Retirement Savings Plan (RRSP) and may have a general idea of what it’s all about. However, there’s a lot more to RRSP’s than simply saving for retirement, such as RRSP investing.
Let’s cover RRSPs a bit more in detail, so you can understand and utilize them better as you commit to preparing for your retirement.
What Is An RRSP?
Some people think that an RRSP is like a mutual fund. While it may be similar, there are quite a few differences. The Canadian government created the RRSP as a type of investment account that acts as an incentive for people to get active in investing for their retirement. They created the RRSP to act like your very own personal pension plan, reducing your current payable tax while saving for the future
Essentially, with an RRSP,you’re able to contribute 18 percent of your annual income to your account without having to pay taxes on that income. This means that your contributions are deductible from income, which can be a godsend come tax time. This not only saves you money now, but it also speeds up your retirement income growth.
One of the best things about an RRSP is that you’re able to invest your money that’s in the account in a variety of income producing accounts, such as mutual funds, stocks, bonds, guaranteed investment certificates (GICs), gold, silver, and more.
So, how can you take advantage of RRSP investing and stay on track for retirement?
Here are 7 expert tips on how you can get the most out of your RRSP investing for retiring.
1. Plan Out Your Retirement Goals
Get clear on how you want your retirement to look. At what age would you like to retire? As far as lifestyle, how do you want to live? What will help you feel financially secure? Start thinking about all this now and make a plan.
2. Contribute Something Every Month
You can start contributing to your RRSP account as soon as you start earning income. The sooner you can do this, the better. Even if you’re on a tight budget, you can still contribute a small amount monthly, such as $40 or $50. Over time, it adds up and you can increase that amount as your income increases or expenses decrease. If you’re not sure if you can afford any amount right now, maybe work on your budget some more and see if there are some places you can cut back. You’d be surprised at how much money can be saved when a strict budget is in place.
3. Setup Scheduled Recurring Contributions
Once you decide how much you’re able to contribute to your RRSP monthly, automate your contributions so you don’t have to worry about taking the time to do so throughout the year. Come tax season, you’ll be happy you did when you see the amount that has accumulated. And, you’ll appreciate the tax break.
4. Use Excess Contribution Room
If you don’t contribute the maximum amount of money each year, remember that in future years, you can use that excess contribution room. For example, maybe this year you can contribute $20,000 to your RRSP, but you’re allowed to contribute $27,230. Now, let’s say next year your income increases quite a bit and you’d like to contribute as much as you can. You’ll still have an extra $7,230 to contribute in excess of whatever the 2021 maximum amounts are.
5. No Savings? No Problem
A lot of people don’t contribute to an RRSP because they don’t have any extra money in savings. If this sounds like you, consider using a loan to get you started. Then, when you get your tax refund, use that refund money towards repaying that loan. Work on budget each year too, creating some room for monthly contributions to your RRSP. Many people find that once they get started, they get excited about actively working towards their retirement with RRSP investing and keep it up.
6. Don’t Buy Anything With Your Tax Refund
It’s tempting to use a tax refund year after year for new gadgets, vacations, clothing, and so on. However, that kind of mentality won’t afford you a nice retirement at an early age. Instead, use that money to pay off any consumer debt that you have and contribute some of it to your retirement RRSP. Those temporary material possessions may feel nice for a short while, but they may also keep you financially strapped – and that’s no fun.
That’s not saying you shouldn’t use any of your tax refund money for pleasurable things or experiences, because you certainly can. Just be wise about the amount and keep your retirement in mind. You can also open a Tax-Free Savings Account (TFSA) for those short-term goals. However, in terms of tax refund, think about using it for your financial future, investing in your RRSP account to get you where you want to go.
7. Save Using The Tax Free Savings Account (TFSA)
RRSP investing is great for retirement and taxes, but so is TFSA investing. A TFSA is a tax saving plan where you can contribute $6,000 each year, and you won’t have to pay early withdrawal tax penalties. For a solid retirement plan, consider using both the RRSP and the TFSA for your short and long-term retirement goals.
Now that you understand RRSPs and investing in RRSPs a bit better, take the necessary steps to get on track with your retirement. The sooner you start, the better.