Four reasons to consider opening or contributing to your RRSP or Group RRSP

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March 1, 2022 marks the deadline for Albertans to contribute to a Registered Retirement Savings Plan (RRSP) for the 2021 tax year. RRSPs are a retirement savings vehicle that allows you to put away up to 18% of your last year’s income and any carry forward room from prior years. The real benefit is that you defer tax on the amount you contribute, until you withdraw the funds in retirement. If you don’t yet have an RRSP account or feel you have underutilized your existing plan or Group RRSP through your employer, here are four reasons to reconsider and contribute to an RRSP consistently.

1. RRSPs are not just for saving

A common misconception is that RRSPs are just glorified savings accounts. While it may say “savings” in the name, you can also invest in an RRSP and rely on the compound growth of your investments within the plan. RRSPs also discourage you from withdrawing your funds until retirement, which maximizes the compound interest you can generate. RRSPs do this by charging both income tax and a withdrawal tax on any funds removed prior to retirement, and permanently removing contribution room in the amount you take out before age 71. For example, if you invested $100 a month at age 35 into your RRSP in an investment fund that generated an annual 6% return and did not touch it till maturity, you could expect your plan to be worth nearly $143,000.

2. Tax-deferred growth

One of the most significant benefits of the RRSP is that any contributions made to your plan in your working years are deducted from your taxable income and, if invested, can grow tax-free while the funds stay in the account. The longer the time horizon before you retire, the more time you have for compound growth to accelerate and grow your retirement nest egg. Once in retirement, withdrawals from your RRSP will be taxed at your retirement income bracket, which should be less than in your working years.

3. Lifelong Learners Plan (LLP) and the Home Buyer’s Plan (HBP)

RRSPs are generally restricted to retirement savings, but they do include unique benefits to help you pay for significant expenditures in your life, like going back to school or buying a first home. The LLP allows you to withdraw up to $10,000 in a calendar year from your RRSP to finance full-time training or education for you or your spouse or common-law partner. Once withdrawn, you have to make annual payments to your RRSP over a ten-year period until the balance is zero. The HBP allows you to withdraw up to $35,000 from your RRSP to buy or build a qualifying home for yourself or a related person with a disability. The repayment period starts the second year after the year you withdrew the funds, with 15 years to repay the funds in your RRSP. It is worth noting that if you fail to repay the funds from either plan in the allotted time, you will lose that contribution room from your RRSP and any missed annual payments will be added to your annual taxable income.

4. Group RRSPS

A Group RRSP is administered by employers as part of its compensation package to employees and can be a powerful savings vehicle for your retirement. One of the biggest benefits of a group RRSP is contribution matching. Employers will define a contribution level as either a fixed dollar amount or a percentage deducted from the employee’s paycheque automatically each pay period. Whatever amount the employee chooses to allocate to the Group RRSP, the employer will match the contribution, effectively doubling the savings rate for the employee. Funds contributed to a group RRSP are invested in securities offered by the financial institution administering the Group RRSP. Most Group RRSP providers offer a selection of funds for varying retirement dates, asset allocations and risk tolerances. If you do not utilize a Group RRSP from your employer or do not contribute the total amount allowed, you may be leaving a significant amount of money out of your possible retirement savings.

With tax time nearing, consider the benefits of opening or contributing more routinely to an RRSP or Group RRSP. Not only will you defer some of your income tax payments throughout your working years, but you will also be creating a nest egg that your future self will appreciate.

Understanding investment accounts

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Just as it’s important to select the right type and mix of investment products (e.g. cash equivalencies, fixed income securities, equities and investment funds) to meet your financial goals, so too is choosing the appropriate type of account to hold them in. Understanding the different types of accounts available to you can help you maximize your gains and reduce the amount of income taxes you owe. 

You can use several types of investment accounts in Canada that are broadly categorized as either “registered” and “non-registered”.

Non-Registered Investment Accounts

Non-registered investment accounts are the most flexible, with no restrictions on how much you can contribute or withdraw. They can be opened at any financial institution or registered firm.

Interest income in a non-registered account is fully taxed at your marginal tax rate, with some special considerations for dividends and capital gains. Dividends are taxed based on the province you live in, while capital gains and losses are calculated on a net basis with taxes at your marginal rate paid on 50 per cent of its value. While this account may seem like a logical first step for new investors, it’s worth understanding the benefits and characteristics of registered accounts before opening a non-registered account. In order to learn more about the different investing accounts available to Canadians, visit CheckFirst.ca and the Government of Canada website.

Registered Investment Accounts

Tax-Free Saving Accounts (TFSAs)
TFSAs, launched in 2009, have unique features that allow you to shelter your investment gains from most taxes. Without the tax implications found in a non-registered account, investment gains in most cases can be fully realized once withdrawn. As a result, TFSAs are becoming increasingly popular among Canadians.

Another unique feature of TFSAs is the contribution room limit. Every year the Canadian government provides additional contribution room to all Canadians. If you were 18 or older in 2009, you are eligible to contribute the full amount of $75,500; if you were younger than 18 in 2009, your contribution room would have started when you turned 18. For the 2021 tax year, every Canadian 18 and older received an additional $6,000 contribution limit in their TFSA. It’s important that you don’t over contribute to your TFSA however, as the excess amount will be subject to a one per cent per month penalty tax.

Registered Retirement Savings Accounts (RRSP)
RRSPs were introduced to Canadians over 60 years ago in order to encourage and reward them for building a nest egg for retirement. By using them strategically, they can benefit you now and in your retirement. For example, contributions you make to your RRSP allow you to reduce your income tax in a specific year by your marginal tax rate applied to your contribution and, if contributions are invested, can even grow tax-free. Additionally, you can use the money in the RRSP account to purchase or build a first home (Home Buyers Plan) and for post-secondary expenses (Lifelong Learning Plan) tax-free if paid back within 15 years. Once you retire, any withdrawals from your RRSP will be taxed at your retired tax bracket, which in theory should be lower than when you contributed during your working years.

While an RRSP can help you grow your wealth for retirement, special rules do apply. You may only contribute up to 18 per cent of your earned income from the previous year, and if you withdraw funds from the account early, immediate withholding tax is applied and your contribution room is permanently reduced. Once you reach 71, your RRSP is automatically converted to a Registered Retirement Income Fund (RRIF) and you can no longer contribute to the account. Instead, you must withdraw a calculated amount each month, which will be taxed at your marginal tax rate. If you withdraw more than the allotted amount, you will be subject to the same withholding taxes as if withdrawn prior to retirement.

When it comes to investing, where you invest is just as important as what you invest in. With a better understanding of the different accounts and their unique benefits and downsides, you may find that one or a mix of different types of accounts can help you better realize your financial goals and grow your wealth for retirement.