RRSP? Me?

We’re in the month of February, which means that we are in the height of RRSP season and the deadline for RRSP contributions to be claimed for the 2013 tax year is fast approaching (March 3, 2014 to be exact).

And if you are like most of the rest of the population, you have left your contributions to the last minute- and may be scrambling to find time (or extra cash) to sock away prior to the deadline.

Or perhaps this is a new concept, and you’ve not been taking advantage of this beneficial investment vehicle. Even if your current focus is all about paying down debt instead of saving for retirement that seems an eternity away, there are multiple reasons to get going now instead of later.

What is an RRSP anyways?

An RRSP is a Registered Retirement Savings Plan. A common misperception with RRSPs is that they in and of themselves are an investment. They’re not.

Think of an RRSP like a basket, in which you place other investments (there are loads to choose from, including GIC’s (Guaranteed Investment Certificates), mutual funds, equities and many others). This group of investments is tax-sheltered (meaning that they will grow without taxation). When you retire, you pull the funds out and the assumption is at that time you will be in a lower tax bracket.

Additionally, the government grants a tax deduction for contributions made to an RRSP. So there are benefits to be derived both today- and in your future.

But Retirement is Decades Away! I have Other Needs Right Now

While the thought of whiling away your golden years in the lap of leisure seems far off (and some days impossible), truly the success of the plan starts today (like right now).

One of the greatest tools an investor has on their side is time. Depending on what type of investments you choose, they will continue to grow over time- which will push your savings to grow faster than if you didn’t invest.

I don’t Have Enough to be an Investor

You don’t necessarily need boatloads of cash to open up an RRSP. Numerous banks and financial institutions offer programs through which you can make automatic contributions, deducted right from your paycheque, often for small amounts. Some employers offer this as well.

Every little bit counts. Remember- small amounts over time will accumulate and grow into something larger.

The benefit here is forced savings. When it is done habitually, it is painless. You don’t feel the cash crunch, but you accumulate savings!

Not Just for Retirement

Your RRSP holdings are not simply meant to fund your retirement. The Government has other plans in place to help with other major life expenses as well, while lightening the tax burden.

First-time homebuyers can take advantage of the RRSP First Time Homebuyer’s Plan, which allows you to take out up to $25,000 to be used toward a down payment on a home tax free.  You are required to repay the funds withdrawn over a 15 year period.

Thinking of going back to school? The Government offers the Lifelong Learning Plan, which lets you take out up to $10,000 per calendar year to fund full-time education. You must repay this as well (10 percent of the amount you’ve withdrawn per year- and you have 10 years to pay the funds back). You are allowed a maximum of $20,000 over a four-year period.

The funds can be used for education for either you or your spouse, but not your kids (there is another program for that- RESPs – which we’ll cover another day).

Your RRSPs can also be used in an emergency, if you need access to funds straightaway. Know though, that you will be taxed at the full amount in this case, and will be charged a withholding tax on withdrawal.