We Asked An Expert What The Heck An RRSP Is & Whether Young Canadians Need To Get One
Everything you've been too embarrassed to ask.👇
The BMO and CIBC buildings in Toronto. Right: A RBC online banking site.
There are a lot of ways to save money in Canada, and one of the biggest is by making the most out of an RRSP.
Sure, you may have heard the term before, but you might be wondering what exactly an RRSP is.
They're often talked about, but are one of those things that you may not fully understand and perhaps you're a little too embarrassed to ask.
So, to help clear things up, Narcity spoke with MoneySense Executive Editor Lisa Hannam to understand what exactly an RRSP is, how they work and whether you really need to care about them.
What is an RRSP?
"An RRSP (Registered retirement savings plan) [...] allows Canadians to plan for retirement income," explained Hannam.
Introduced in Canada back in 1957, the RRSP is meant to allow users to deposit income for the future, avoiding that deposited amount being taxed at the user's current income bracket to save money down the line when retirement income puts the user into a lower bracket.
How does an RRSP work?
"You can open an RRSP at a big bank, online bank or other financial institution," Hannam explained.
And once that's been set up with your bank, you can start squirrelling away some funds.
You can deposit the money you save, as well as any earnings you make on investments or other assets, inside the account.
"During your working years, the money you put toward your RRSP is subtracted from your taxable income for that year or 60 days of the previous year," said Hannam.
But she does note that there is a cap on how much you can put in each year.
"The limit is the lower of the following: 18% of your income or the annual RRSP limit, which is $30,780 for 2023, and $29,210 for 2022. Unused contribution room does carry forward, though."
Can I cash out my RRSP?
Yes, you can, however, you will be taxed on those amounts.
Hannam notes that early withdrawals from your RRSP (meaning before you retire) happen "preferably when you have little or no income and are in a low/lower tax bracket."
When should you open an RRSP?
There's a good rule of thumb that Hannam shares: "Whenever you start working is a good time to start contributing."
"That said, the best time is whenever you can, even now," explained Hannam. "The benefit of starting right away is the time for growth and compound interest."
And, it makes sense.
The earlier you start adding money, the longer the interest has time to compound. But, Hannam is quick to point out that when and how much you start contributing is up to you.
"What makes sense for you, your goals, your lifestyle, your retirement plans and your other retirement savings, such as a pension, is best."
Do young Canadians need to worry about an RRSP?
Hannam makes it clear that your RRSP is not something to be worried about, but rather simply "something to do."
"Knowing the kind of retirement lifestyle you want to have is key," said Hannam.
"Do you want to work beyond 65 or retire early? How much debt do you have? How much can you afford to contribute right now? ... [These] and other questions an advisor may ask you will help you determine how much to start putting away."
Plus, as a young person, you have time on your side. If you start contributing now, it can mean big savings later in life.
For example, Hannam explained that "contributing $400 a month at age 20 comes to more than $600,000 in an RRSP by age 65, assuming the 4% rate of return."
"Also, if your employer has an RRSP-matching plan, do it, even if you’re not sure about your retirement plans. It’s bonus money with interest."
So, hopefully, with these tips, you can start saving up your cash for your future.
Be aware that Canada has also recently rolled out a tax-free account to start saving up for your first home purchase.
This article's cover image was used for illustrative purposes only.