“Exciting” might not be the first word that springs to mind when it comes to RRSPs, but that might change when you think about what they can do for your money. “Considering the tax savings and growth potential RRSPs provide, they’re a vital part of your investment strategy,” says Jamie Golombek, Managing Director, Tax and Estate Planning at CIBC Private Wealth.
Here’s why RRSPs are one of your most powerful investment tools:
Shrink your tax bill
Yes, that’s right. One of the biggest benefits of saving in an RRSP is getting to claim a tax deduction for the full amount you contribute. Let’s say you put $5,000 into your RRSP. If your tax rate is 40%, you’d save up to $2,000 on your income taxes. As long as you have enough RRSP contribution room you won’t be penalized.
Not sure if you’ll get the most bang for your buck with a tax deduction this year? “If you think you’ll be in a higher tax bracket down the road, you can wait and claim your deductions in a year when you’ll get a higher tax refund,” says Golombek.
Grow your savings faster
An RRSP gives your investment that extra boost. “Once you contribute to an RRSP, your money can grow tax-deferred until you take it out. Over the long run, that tax-deferred growth can really accelerate your savings,” Golombek says.
What does tax-deferred growth mean exactly? As long as you keep any investment earnings — like dividends, interest or money you made when stock prices went up — inside your RRSP, you get to hold on to the full amount. That’s more money you can reinvest to keep growing, which is what’s known as compounding.
Let’s say you have $5,000 to invest and your tax rate is 40%. Assuming you’ll get a 6% rate of return, the graph below shows how big your investment would grow to, after tax, in your RRSP compared to a non-registered account.
Keep in mind that if your tax rate is 40%, putting $5,000 into an RRSP is the same as investing $3,000 outside of an RRSP because of the tax deduction you get.
Non-registered investment versus RRSP
Non-registered investment versus RRSP
10 years | 20 years | 30 years | |
|---|---|---|---|
Non-registered investment | $4,273 | $6,086 | $8,668 |
RRSP | $5,373 | $9,621 | $17,230 |
Return to options
This example assumes you’ll take the full amount out of your RRSP at the end of the time period and that you’ll be taxed at the same rate as when you made the contribution. So as you can see, even if you have the same tax rate in retirement, you still end up with a higher amount.
For another look at how tax-deferred investing can accelerate your savings, try our RRSP calculator.
Big savings for big goals
Whether you’re dreaming of buying a new home, pursuing a passion, or retiring to a sunny spot on the beach, the savings power of RRSPs can help you bring the pictures on your vision board to life.
Buy that house
If you’re saving to buy your first home, the money you save and grow in your RRSP can go a long way to helping you achieve your goal. Under the Home Buyers’ Plan, you can borrow up to $35,000from your RRSP for a down payment. You won’t be taxed on the withdrawal as long as you follow the RRSP repayment rules.
Study what you love
Want to learn about your favourite subject or take your skills to the next level? Under the Lifelong Learning Plan (LLP), you can withdraw up to $20,000 to pay for full-time education or training for you or your partner. If you follow the repayment rules, you won’t be taxed on your LLP withdrawal.
Retire — and live the good life
What does your dream retirement look like? A once-in-a-lifetime European riverboat cruise? Painting masterpieces in your own home art studio? That’s where your RRSP — and all that tax-deferred investment growth — can make a big difference.
Putting money into an RRSP now is one of your best chances to save on taxes. And the sooner you contribute, the sooner you’ll start to grow your savings which can help you feel confident about living the life you want. Talk to an advisor about how contributing to an RRSP can help you reach your goals.
