As soon as you turn 18 and have a job, you can contribute to a registered retirement savings plan, or RRSP. But is this a good idea for you? Let’s explore this by asking a few questions.
What do your finances look like?
1 – Why do you want to save?
For retirement? To buy a house or condo? Or to have some financial flexibility? Your answer will determine whether an RRSP is the best savings vehicle for you.
- If it’s for retirement, an RRSP (hyperlien) is the way to go!
- If you’re saving to buy your first condo or house, you might want to prioritize an FHSA (hyperlink), even though a HBP (hyperlien) is also very useful.
- If it’s to give you financial flexibility, a TFSA (hyperlien) would be the best choice.
Did you know that… the compound interest generated by all these registered plans works for you! Over time, interest accumulates and, because it’s reinvested, it increases your capital ($++), regardless of the amount of your contributions!
2 – What’s your current and future income?
- If your current income is not very high ($$), your tax rate won’t be very high either, and your tax deductions will be smaller.
- On the other hand, if you know that your income will increase rapidly ($$$) once you start working in your profession, consider the benefits of tax deductions. RRSP deductions can be very attractive, especially if you contribute the maximum amounts.
Did you know that… you can defer your RRSP deduction to a year when your income, and therefore your tax rate, will be higher? This is an option to consider when you have a lower income but are still able to contribute.
3 – Do you have financial discipline?
- Can you make a budget that takes into account all your income and, especially, all your expenses, and stick to it?
- Do you easily give in to impulse purchases (clothes, tech gadgets) or the urge to treat yourself (going out, traveling, etc.)?
Did you know that… withdrawing money from your RRSP account (except for the HBP) before retirement means that income tax on that amount will be withheld at source when you make the withdrawal? In addition, the amount withdrawn will be added to your income for the current year and could increase your tax rate. Remember that an RRSP is a savings account, not a transaction account!
4 – Should you pay off your debts first?
- If it’s student debt, you’ll have various options for repaying your student loan once you’ve completed your studies: check with your lending institution.[1] Also keep in mind that the interest paid on your government loan will entitle you to a non-refundable tax credit, which can put money in your pocket to boost your RRSP contributions ($$).
- If it’s credit card debt, the high interest rate on this type of debt means you should pay it off quickly: compound interest accumulates as quickly, if not more quickly, on debt than on savings!
Are you in the following situation:
Employee?
If your employer has set up a company pension plan and offers you matching contributions, take advantage of it. Never turn down money that’s offered to you, especially when it comes to a company savings plan!
In the process of incorporation?
As part of your plan, consider your cost of living to determine your compensation strategy, i.e., whether you should pay yourself dividends or a salary. If a salary is preferable, it’s considered eligible income for accumulating RRSP contribution room, which in turn will allow you to make tax-deductible RRSP contributions.
So, should I save in an RRSP or not?
There’s no one-size-fits-all answer: it depends on your goals, your financial habits, and also your current and future income. Think about all of this, talk to your advisor, and take action: it’s the best way to ensure your financial independence!
[1] In the case of a student line of credit, you must pay monthly interest on the amount borrowed during your studies, and you’ll have one to two years (depending on the terms of the lending institution) after completing your studies to begin repaying the principal as well.
