The RRSP’s Secret Weapons

When it comes to the Registered Retirement Savings Plan (RRSP), there is a lot of information out there, and it may be hard to decipher what information is most relevant to you and your financial situation.  We want to cut through the noise and share three core facets of the RRSP that are important to know when thinking about contributing.

 

Income, Tax Deferral & Compounding

One big factor when thinking about how to use your RRSP is your income.  You need to see a bit into the future and estimate how much you will be earning at the peak of your income-generating years, then how much you will be earning in retirement, most likely less than your full income earning years.  As a general rule, many financial advisors recommend that you be in a 40% or higher marginal tax rate bracket when contributing to an RRSP. 

Contributing to an RRSP is essential in order to take advantage of the tax-deferral options of the RRSP.  When you contribute to your RRSP, you receive an income deduction from the government and the tax refund or tax credit is calculated based on your marginal tax rate.  This can put a lot of extra money in your pockets.

When dealing with the RRSP, you must remember that money will be taxed as income when you withdraw any amount from your account. Essentially, this means you can defer your taxes until a time when you are in a lower tax bracket and closer to, or in, retirement.  Keeping this in mind when planning your retirement can save you thousands of dollars in unnecessary tax.

Lastly, keep in mind that returns in your RRSP are tax-deferred and remain inside your RRSP allowing for the compounding of returns until removed from your RRSP.  This is a very powerful re-investment tool to keep in mind.

 

Tax Refund

As previously mentioned, you receive an income deduction when you contribute to your RRSP which is effectively money straight from the government to you.  The second advantage to the RRSP is the ability to use this extra money and make it work for you.  There are many ways to put your tax refund or reduced taxes payable to good use and, if used right, you can set yourself up for a great retirement.

You can use the tax refund or money saved by paying less taxes to make another contribution to your RRSP which will result in another tax refund or credit next year.  In order to make your RRSP contribution you can also take out an RRSP loan and contribute it to your RRSP.  Then, when you receive your tax refund, immediately put it towards your loan repayment.  This will put you years ahead of your repayment schedule and still help you save for retirement.  Finally, in addition to many other options, you can use it to pay off any other debt you may have.  In the long run, this will also put you in a better position.

 

The Home Buyers’ Plan

Lastly, the final secret weapon the RRSP holds is its use in helping you buy a house. This plan gives first-time purchasers the chance to use up to $35,000 of their RRSP, per person, to put towards a down payment on a house (“First Time Home Buyer’s Plan”).  In a country where the housing market always seems to be on fire in key areas, this can be a great tool.  If you utilize this, you have up to fifteen years to repay the sum back to your RRSP.  This will hold you accountable and keep your retirement savings on track, while also allowing you to invest in the real estate market.  Want another smart way to use your tax refund (which you received from contributing to your RRSP the previous year)?  Along with getting a $35,000 loan from your RRSP use your tax refund to boost your down payment and/or increase your buying power.

A little known fact about the First Time Home Buyer’s Plan is that your home purchase need not be your first home purchase.  If you have not owned a home in CRA’s qualifying period January 1 in the last four years preceding the first time home buyer’s withdrawal from your RRSP you qualify for the program as well.

As you can see, the RRSP holds many secret weapons … not just one.  Use these to your advantage, and you will not have to worry less about your retirement.  There are certainly ways to make the journey to retirement more enjoyable and less stressful!

If you or anyone you know has unused RRSP contribution room, e-mail me at bmoylett@wisdomsi.ca to find out about a complete retirement plan in one simple financial product.  You can also reach me at 778-951-2806.  I would love to help you or anyone you know retire on time.