When is the best time to start contributing to an RRSP?
The key to a large RRSP is time. Time to allow contributions to grow. The longer your money is invested, the greater the opportunity it will have to grow.
Here's an example:
Let’s say you’re 25. With a $100-per-month contribution, assuming a 6% annual rate of return, the $48,000 you’ll save by the time you’re 65 in 40 years will yield nearly $197,000. That's the beauty of investing over a long period of time.
Remember that this is just an example and that there is no guarantee of this rate of return.
What if you start later? To get the same $197,000 total by age 65, using the same 6% return-per-year assumption, you would need to increase your monthly contribution:
|Starting age||Monthly contribution needed|
Let the power of time work for you. Invest what you can as early as you can. When you retire, you will be happy you did.
How long can I have an RRSP?
You must close your RRSP (i.e., transfer all the money from it) by the end of the year in which you turn 71. If you choose, you may close it any time before that.
What are my options when I close my RRSP?
You have 3 options:
- Take the money in cash
- Buy an annuity
- Transfer the money to a registered retirement income fund (RRIF)
Cash could be a costly option, depending on your marginal tax rate, as all the money will be taxed in the year you withdraw it.
An annuity provides a guaranteed income for life or until age 90 – and the annuity income will only be taxed when you receive it. Learn more about payout annuities.
A RRIF allows you to keep your money invested with the opportunity to grow, tax-deferred. Every year you must withdraw a minimum amount from your RRIF. Any amount taken above the legislated minimum amount will be taxed.
How can I deal with market volatility?
Market volatility is a fact of life in equity markets. The value of investments goes up and down in the short term. But that should not prevent you from investing. After all, while there’s no guarantee of future performance, historically, investments with higher volatility have delivered superior returns over the long term. Still, many people worry about putting money into an equity investment just before a major market downturn. If that worry keeps you out of the market, you’ll miss the potential for the long-term returns that equity investments can offer.
A highly studied technique called dollar-cost averaging helps you get into equity-based investments over time if you aren’t up to taking the plunge all at once.
Sounds complex? How does this tie into your investment planning? How do you get set up with this dollar-cost averaging deal? It's easy.
Dollar-cost averaging “just happens” when you set up automatic deposits into a fund-based plan, where you deposit the same amount of money at regular intervals (monthly, for example) over the course of the year.
You don’t have to worry about timing the market. Your deposits buy more units when the markets are low, and fewer when the markets are high. Overall, you won’t get all your money in at the top, or at the bottom. But your money will be in the markets, and can benefit from the potential for superior long-term investment performance.
And the more your investment portfolio is worth, the better your retirement lifestyle will be – just what you're looking for.
When can I withdraw money from my RRSP?
You can withdraw money from your RRSP at any time, but once withdrawn, that contribution room will not be regained. The amount you withdraw is included in your taxable income for that year and is taxed at your marginal tax rate. You can see the impact withdrawals have on your RRSP savings with the RRSP contributions and withdrawals calculator.
Please note that if you're making a withdrawal to buy a house or to further your or your spouse's education, different rules may apply. Speak to an advisor or visit the CRA website for more details.
What’s the RRSP Home Buyers Plan?
An RRSP can not only help you save for retirement – it can also help you save for your first home. The Home Buyers’ Plan lets you borrow up to $25,000 from your RRSP – and your spouse can borrow the same amount from his or her RRSP – to put towards your down payment.
This way, you get the money you save, the investment growth it will generate – and significant tax savings.
Although you are essentially borrowing from yourself, you have to pay it back within 15 years, or be taxed on the amount you withdrew. You’ll also be taxed if you miss a payment.
Visit the Home Buyers’ Plan website for more information.
What’s the Lifelong Learning Plan?
Did you know that you can also use your RRSP to help pay for the education and training you may need to build your career or start a new one?
Through the Registered Retirement Savings Plan Lifelong Learning Plan (RRSP LLP), you can take out up to $10,000 per year ($20,000 maximum) from your RRSP tax-free, for tuition for you or your spouse.
As with the Homebuyer’s Program, you must repay your RRSP by a certain deadline or be subject to tax.
Visit the Lifelong Learning Plan website for more information.