Is RRSP right for YOU?
Are you thinking about your retirement and wondering if an RRSP is right for you? In the latest Street Smarts with Taayla video, we’ll dig deeper into this question and find a solution that works for you.
What is an RRSP?
If you’re unfamiliar with or new to RRSPs, you’re not alone! An RRSP, or Registered Retirement Savings Plan, is one of the most commonly misunderstood types of investment accounts.
My clients will ask me if an RRSP is right for them, and as much as I’d like to give a simple “yes” or “no,” I usually tell them it depends — because it does!
How to know if an RRSP is right for you
Before I can know if an RRSP is the right choice for you, I need to know five key things about you: your age, income, first home, education, and emergency funds.
When to take advantage of RRSP savings
An RRSP can be an excellent tax savings and a great way to save for retirement. However, if you’re under the age of 30, chances are you’re not at an income state where you can best take advantage of the RRSP savings.
Because when you make less money, you’re also paying little to no income taxes. If you wait until your earning increases before you contribute to your RRSP, then the potential to save on your taxes could be higher than they are now.
While I don’t usually recommended having an RRSP for incomes under $50,000, if you do decide to contribute to one, you don’t have to claim the plan on your taxes for the current year — you can carry it forward indefinitely.
For example, if your income is $20,000 today, and you believe your income will continue to increase over time, then start saving in your RRSP today. Just make sure to wait until you are at a higher marginal tax rate before you apply your RRSP against your income, whether that’s next year or somewhere down the road.
How to use an RRSP to reach your goals
In my previous video on RRSPs, I talk about how you could use your RRSP toward the down-payment of your first home, or toward the cost of a full-time education. While RRSPs are an investment account for your retirement, there are many benefits to utilizing your RRSP sooner rather than later.
If you’re looking to buy your first home, or want to pursue higher education, then go back and watch how RRSP can help you achieve these goals.
When to prioritize an RRSP
The last thing to consider when deciding if an RRSP is right for you, is the status of your emergency fund. If you have little to no emergency fund, then establishing a solid fund should be your first priority!
Fill your emergency fund before your RRSP, because an RRSP cannot protect you quite like an emergency fund can. While you can withdraw money from your RRSP, there are tax consequences for doing so.
I recommend to my clients to keep an emergency fund worth at least three months of their salary — ideally six months.
Let’s think about this scenario: you have accumulated $30,000 in your RRSP and now you have an emergency where you need cash quickly. You decide to take out the $30,000, but what you don’t realize is that when you do that, 30 percent is being withheld. Now you only have $21,000 you can use!
You would then have to include the $30,000 withdrawal from your RRSP in your income taxes for the year. So if your standard income for the year was, say, $50,000, and you added the $30,000 to that, your income tax return would then be based off $80,000 — a much higher marginal tax rate.
RRSPs are meant to be withdrawn from strategically, and in emergency, you don’t have time to plan for that.
Thank you for reading along in my latest post. I hope this dive into RRSPs has been helpful in allowing you to decide whether or not an RRSP is right for you.
Ask me questions in the comments section below, and let me know what other savings vehicle you are using for your retirement. I’d love to learn more!
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