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17 January 2013

RRSPs. The mere mention of them may make your eyes glass over and your mind start to wander. Or, maybe the idea of RRSPs and preparing for your future is something that excites you – it definitely should! For the former group, talking about and dealing with RRSPs can be a bite overwhelming simply because for many, this savings vehicle is the most confusing type there is. That’s why we’ve prepared for you a brief RRSP FAQ. So you can know how to start saving for the future; and you too, can become excited whenever RRSP talk pops up.

What is an RRSP?
You can’t live in Canada and not hear about RRSPs at some point. The amount of things you can do with an RRSP is long and keeps growing every day, including things such as buying a home and making investments. But all of that is just how you can use an RRSP; it’s not actually what an RRSP is. An RRSP is simply a savings vehicle. It’s a tax-protected account that allows you to build wealth and save money for your retirement – which is why it’s called a Registered Retirement Savings Plan.

How much can I contribute to my RRSP?
This is probably the biggest question asked  after ‘what is an RRSP?’ Each year you can contribute up to 18 per cent of your income the previous year and Revenue Canada will mail you a notice of assessment every year that tells you how much you can contribute for that year. There is also a maximum set out every year; for 2012 it’s $22,970.

What is the ROR on an RRSP?
This is a common question with RRSPs but again, these accounts are not investments and so, other than the interest that collects, you won’t see a return on them. For that you’ll have to speak to a financial advisor that can give you the best advice on where to invest the money from your RRSPs.

What happens if I pay too much to my RRSP?
The federal government slaps a limit on RRSP contributions for a reason. If you go over your allowable amount Revenue Canada will charge you 1 per cent each month on the overflow of money in the account.

When should I make contributions?
There is a mad rush every year at RRSP deadline time. People want to make sure that they squirrel their money away and protect it from Revenue Canada’s damning finger. This year the deadline is March 1, so if you haven’t put enough money into it yet, you may want to consider doing so. And next year, consider putting money into the account every week, every month, or every pay day. Not only will it relieve you from the pressure of that March deadline, but it will also mean that your money is working for you sooner.

How do I make contributions?
First, you need to set up an RRSP (see next question.) Then you simply add into it, just as you would any other account. You can even ask the bank to automatically transfer money from your chequing account into your RRSP on a schedule you set up with them. Of course, just going into the bank and putting money in yourself, or making the transfer online, are always options, too. One options that many people don’t know about is that you can borrow your RRSP contribution. This can be a risky option, and you have to make sure you can pay the loan back right away. But for those who want the tax shelter but don’t have the cash on-hand, this can be a good option.  

How do I set up an RRSP?
This one sounds easy – go to  a bank. Where does it get hard? Deciding which bank to go to. Just like when you were setting up your mortgage, don’t just go to your home bank or the first one you see. Investigate, research, and find which bank will give you the best deal for setting up an RRSP through them. Right now BMO will give you 15 per cent of the first contribution you make, up to a maximum of $150, if you open an RRSP account with them.

Should I use an RRSP or a TFSA?
In order to answer this question, you must ask yourself what you’re saving the money for. Is it for retirement that you won’t need for another 20 years? An RRSP is probably the best choice. Do you think that you’ll have car repairs, roof repairs, or other major costs coming up in the next two to five years? A TFSA may be a better option, as you won’t face penalties for pulling out the funds. Also remember that you don’t have to use one or the other. A combination of these two accounts could give you the best of both worlds.

How much do I need for retirement?
Of course, in order to know how much you need to save, you’re going to need to also know how much you’re going to need. The general rule of thumb is that you save 70 per cent of what your yearly income is now, in order to maintain your current standard of living. However, some analysts believe that because your standard of living generally isn’t the same during retirement as it is now, you can manage only saving 50 per cent of today’s income.

RRSPs are an excellent savings tool, they’re a great investment vehicle, and they can really help you out on tax day. Take advantage of these savings accounts, and start finding out exactly how they can help you realize your financial dreams!

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