Having RRSP FOMO?
Posted on Fri, 16 Feb 2018 in: General Comments: 1
If you’ve used your online banking, watched television, or checked your social media in the last two weeks then you’ve seen ads telling you the RRSP deadline is fast approaching (March 1) and you better act fast. The ads will include growth charts and images of happy couples enjoying their retirement, they’re meant to make you feel guilty for not contributing and fear missing the deadline.
Don’t worry if you haven’t contributed, the RRSP deadline is pushed by banks and investment firms to drive up their contribution base. If you’re a young professional we have a more strategic alternative for you.
An RRSP is an income tax deferral vehicle that allows you to grow your savings without paying tax on the growth. When you put money into your RRSP you’re saying that you did not earn that money as income this year, instead you will earn it in retirement when you withdraw from your RRSP. If you contribute, the government owes you money back because it over taxed your income that year, however, you will have to pay income tax when you withdraw that contribution in retirement.
RRSPs have tremendous value to Canadians in high tax brackets as it is likely their income tax will be much lower in retirement. RRSPs have far less immediate value to young people that are in lower tax brackets, especially when compared to TFSAs.
Every year the RRSP contribution room you do not use is carried forward until you’re 71. To best utilize your RRSP, you should bank as much contribution room as you can while you’re young and then take advantage of it when you’re in your 40s-50s, as those are your peak earning and tax years.
Instead of contributing to your RRSP, you can contribute to your TFSA, which also allows for tax free growth and you can withdraw the funds at any time without paying income tax. We should note, you will not get any money back from the government when you contribute to your TFSA.
You might hear from your friends and family that RRSPs let you withdraw tax free when you buy your first home, which is true, but this exemption only allows you to withdraw $25,000 per person and you must contribute the money back over the next 15 years.
If you have been a permanent resident or citizen of Canada since 2009 you have up to $57,500 in cumulative contribution room available in your TFSA. This means that you can withdraw more from your TFSA to buy your first home and are not required to contribute any of it back. Given that purchasing a first home can come with greater expenses or family planning, this cash flow freedom is important.
All saving is good saving, so don’t feel bad for contributing to your RRSP, but also don’t feel irresponsible if you’re not contributing to one yet. If you’re a young professional consider waiting to contribute to your RRSP and focus on building your TFSA instead.
By Eric Morrison Fri, 02 Mar 2018
I didn't realize the RRSP first time homebuyer's rule was only 25,000 per person