Saving for your RRSP? Why it's not too late

For Canadians who aren't regularly saving for retirement, the idea of getting started can be a little daunting. After all, we always hear the key to building a retirement nest egg is to start early. For example, if we're in our 40s and up, we might feel like we've missed our chance. But nothing could be further from the truth. While there's never any downside to start saving earlier, there are still many benefits to starting our RRSP savings later. Remember, you can contribute to your RRSP up to the end of the year you turn 71. So, if you're in your 40s, that could be mean three decades of tax-deferred savings growth. 

More than a third of Canadians have no retirement savings.1

If you haven't contributed to your RRSP for a while or haven't started one yet, you may have built up a large amount of contribution room. Making a lump-sum contribution could generate a tax refund which you could use for other purposes like paying down debt, investing, or topping up your TFSA. Even small contributions add up over time thanks to the many tax advantages of RRSPs. The important thing is simply to start.

And there's no better time than the present. Kickstart your RRSP savings today and begin taking advantage of all the great RRSP benefits.

6 reasons why you should get started with an RRSP contribution today

1. The magic of compounding

Compounding interest is earning "money on money". In an RRSP, you receive the interest on your initial deposit— and then interest on the original amount— plus the interest it generated. In RRSPs, the interest is tax-sheltered, so it compounds even faster. 

Here's an example: If you contributed $1,000 at the beginning of each year for 30 years into an RRSP and earned 5 per cent, at the end of the period you'd have $69,761, not $30,000. That's the power of compounding! 

$1,000 at the beginning of each year for 30 years

Without RRSP:

$30,000

With RRSP (5%):

$69,761

2. Reduce the tax you pay

Save for retirement and reduce your taxable income at the same time. Each time you make an RRSP contribution (up to your maximum contribution limit), you reduce your taxable income which means paying less tax or potentially even getting a tax refund. 

3. Savings grow faster

Your savings have the potential to grow faster inside an RRSP because they are tax-deferred; you don't pay any tax on the investment earnings until you take the money out, usually when you're in a lower tax bracket. Also, because there are taxes to be paid when the funds are withdrawn, we're more likely to keep our savings inside an RRSP longer.

4. Borrow to buy a home (and more)

You can use your RRSP savings to buy your first home or for education costs for you or your spouse/common-law partner, without paying tax on the withdrawals, as long as you repay the money within a prescribed period. Under the Home Buyers' Plan, you can withdraw up to $35,000 for a down payment on your first home, and the Lifelong Learning Plan allows withdrawals up to $10,000. 

5. A spousal RRSP can lower the amount of tax you pay

If you are the higher earner, contributing to a spousal or common-law partner RRSP can give you a tax break now, and also later when the money is paid out. 

6. Carry forward unused RRSP room

If you're unable to contribute the maximum contribution amount to your RRSP, you can carry the unused RRSP room forward to future years. The maximum contribution amount for the 2022 tax year is 18% of your 2021 earnings, up to a maximum of $29,210. If you haven't contributed for a while, you may have a large amount of unused contribution room. Making a lump-sum contribution could give you a tax refund which you could use for other things such as paying down debt or investing or topping up your TFSA. 

An RRSP is your savings superhero

RRSPs are the superheroes of savings accounts because they're one of the best ways to cut down your current-year tax bill while saving for retirement. To learn more, visit the Manulife Group RRSP page.

Ready to contribute to your RRSP today?

Sources:

1BDO Canada, 2019