Are RRSPs Worth It?
With February well on its way, many Canadians are looking at ways to minimize their tax bills. Tax savings for Canadians are few and far between, but one of the most appealing methods to save on income taxes is through an investment in an Registered Retirement Savings Plan (RRSP) .
There are many people that are still confused about what an RRSP is. I’ve heard comments from people such as “I don’t want to buy an RRSP because I’m afraid that I’ll lose everything if the stock market crashes”. So, just to be clear, an RRSP is NOT an investment. Rather, it is a name for a type of investment that is specifically for your retirement. It is akin to calling your bank account a “chequing” or “savings” account.
The benefit of an RRSP is that it reduces your taxable income and, in effect, saves you the income taxes at your highest marginal rate. For example, if you are single, between 20 and 55, live in BC and are earning $60,000 per year, your income tax bill will be around $11,055. If you contribute $1,200 per year to an RRSP, your tax bill will be reduced to $ 10,700…. a savings of
$355. The effect is even more apparent for higher income earners. For example, if you earn $100,000 then you’d save $459. If you earn $25,000, then you’d save $279.
So, what’s the catch? Well, you have to pay income taxes on the money that you withdraw unless you withdraw it for education or first-time home purchase.
If you are interested in seeing how much money you will save by purchasing an RRSP at your individual income level, there is a handy income tax calculator at http://www.taxtips.ca/calculators/taxcalculator.htm
Final word: Contributing to an RRSP may not be the best alternative for your specific situation. Sometimes it may be more efficient to pay down a mortgage or save in a Tax-Free Savings Account. I would recommend talking with an investment/retirement specialist at your local bank (they usually offer free advice to account holders and are not solely driven by commissions). Or, if you have specific questions, you can post them as a reply and I will give you my take on the situation and then you can seek a second opinion.