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Saving for retirement

January 30, 2019

Opening your first RRSP? Here’s what you need to know

Registered retirement savings plans are a young investor’s friend. Starting one is easy – and the sooner, the better. Here’s how to get a good start.

Are you ever too young to contribute to a registered retirement savings plan (RRSP)?

The answer is emphatically no.

Look up age limits in the Canada Revenue Agency (CRA) guide to RRSPs and you’ll find just one: 71, which is the age you’ll be at the end of the year you have to shut down your individual RRSP and begin withdrawing the money in it. You will do this by opening a registered retirement income fund [RRIF], buying an annuity and/or taking the cash.

That means all Canadians who haven’t reached 71 – as long as they’ve earned income in the previous tax year and reported it to the CRA on their tax return – can open and contribute to an RRSP.

That said, there may be age restrictions on some of the types of investments you choose for your RRSP. Your advisor can help you understand the rules.

How RRSPs work

Think of RRSPs as umbrellas under which you can hold a wide range of investments, including stocks, bonds, guaranteed investment certificates, mutual funds, segregated funds and even cash.

(Don’t take that to mean you need a complete investment plan before you open your RRSP. A Sun Life Financial advisor can help you pick the right investments for you.)

Once you’ve opened your RRSP, you get two key benefits that can potentially help you meet your savings goals in both the short and long term:

  • RRSPs provide tax-deferred growth. Money held inside your RRSP grows tax-free until you withdraw it – ideally when you’re retired and in a lower tax bracket.
  • RRSPs come with a potential tax deduction. You can deduct RRSP contributions from your income (up to annual limits) when you prepare your yearly tax return. For the 2018 tax year, you can contribute up to 18% of your earned income from 2017, to a maximum of $26,230. For 2019, the maximum is $26,500.

Don’t worry about hitting the maximum every year, though. Your unused contribution room carries forward, beginning once you’ve filed your very first tax return.

So if you’re in school and earned, say, $5,000 from a summer job in 2018, you’d have $900 worth of room to carry forward, which you can use to make bigger contributions and defer more tax at a later time, when your earnings presumably increase. (The CRA keeps you updated on your contribution room in your notice of assessment, which you receive after filing your annual tax return.)

Remember, the money you earned in the previous year is crucial to calculating how much you can contribute to your RRSP for the current tax year. And your yearly RRSP contributions can result in a substantial tax refund that you can use to reinvest in your RRSP, pay down debt, or invest in another tax-sheltered vehicle such as a tax-free savings account (TFSA).

Why now is the time to open an RRSP

As a younger investor, opening an RRSP gives you two other advantages:

  • The magic of compounding. Let’s say you’re 26 years old and can put just $1,000 in your RRSP in 2019. Fast-forward to 2064, when you’re 71 and must convert your RRSP savings to income. Based on a 5% yearly return, that $1,000 will be worth $8,985 (assuming annual compounding and an investment period of 45 years).
  • A leg up in buying your first home. Under the Home Buyers’ Plan, you can withdraw up to $25,000 from your RRSP to buy or build your first home. This withdrawal is tax-free so long as you pay it back into your RRSP within 15 years, subject to minimum yearly repayments.

The first step: Choosing the right RRSP

Before you head to your financial institution to sign the papers, you’ll want to pick the type of RRSP that’s right for you. This often comes down to whether you’ll be investing on your own or alongside others.

For example, your employer may offer a group RRSP. The benefits of going this route may include matching contributions from your employer, lower management fees on the investments you hold in your RRSP, and the ability to make automatic contributions straight from your paycheque.

There are also spousal RRSPs. If you’re married or in a common-law relationship and one of you earns significantly more than the other, the higher earner’s contribution to a spousal RRSP for the lower earner will potentially get a bigger tax deduction. Then in retirement, the lower earner – who will likely still be in a lower tax bracket – can withdraw the cash at that lower tax rate.

Setting up your RRSP

Let’s say you’ve settled on an individual RRSP. If you want to diversify your investments, you may open more than one RRSP – but your contribution limit remains the same, whether you have one or several RRSPs. There is typically no cost to set up these plans: You simply make an appointment with an advisor and fill out the paperwork.

However, you may pay fees on the individual investments you choose for your plan. Mutual funds, for example, will charge management fees. (Note that these are typically taken directly out of the fund’s returns; you don’t get a physical bill.)

And if you have a self-directed RRSP, in which you make buy-and-sell decisions yourself, you’ll also pay commissions on each transaction you make, just as you would in a non-registered brokerage account.

The bottom line?

You and your advisor should review the fees for any investment before you buy.

Finally, when you’re opening your RRSP, your advisor will ask if you want to name a beneficiary for your RRSP.

If you die, your RRSP can bypass your estate and go directly to your named beneficiary. If you name your spouse as the sole beneficiary, the cash can roll into your spouse’s RRSP tax-free.

Be aware that naming anyone other than a qualified spouse can have serious tax implications. If you name another adult family member who isn’t a qualified beneficiary, for example, the value of your entire RRSP would generally be taxed as regular income in the year of your death.

Your advisor can help you set up your RRSP and decide what investments to put in it. You can use your RRSP to reach both your near- and long-term savings goals. To get started, contact a Sun Life Financial advisor near you today.

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