Starting Early - Am I too young for an RRSP?

After your monthly bills are paid and essential expenses are covered, the extra cash that is left over probably doesn’t spark thoughts of retirement savings. But starting early, even with small amounts, can give your savings time to grow, and give you more freedom in the future.

If you are new to investments, a Registered Retirement Savings Plan (RRSP) is a government-registered account designed to help people save for retirement. However, it is more than just a retirement investment. Read on to learn more about RRSPs and why they should be on your radar sooner rather than later.

When Can You Start

There is no minimum age requirement to open a RRSP, but there are two conditions that must be met. First, you must be earning income, whether from employment or business. Your income is what the Canada Revenue Agency (CRA) uses to calculate your contribution room for your RRSP. Your contribution room represents the maximum amount you can contribute to your RRSP for the year, and because it is based on your annual income, it can change year to year. The simplest way to find your current contribution limit is to log on to your Canada Revenue Agency online account.

The second condition is that you must be over 18 to contribute more than $2,000 a year. You can contribute to your RRSP right up until December 31^st of the year you turn 71.

With the basics covered, let’s explore why starting early is one of the smartest financial decisions you can make.

Contributing to your RRSP

When it comes to contributing to your RRSP, there is no minimum contribution requirement. You decide how much you can afford to contribute and when, whether by pay period, monthly or annually. While your income may be lower when you are younger, your expenses are also often lower. You may not have a mortgage yet, and you could still be living at home, which can make this an ideal time to start contributing and building a foundation for your future.

Compound Interest

Compound interest helps your RRSP grow faster over time than a regular savings account, as you are earning interest on your interest. This means that you earn interest not only on the money you put in, but also on the interest your savings have already earned.

For example, if you contribute $100 to an account with a 5% annual interest rate, you will have $105 at the end of the year. In the next year, you will earn interest on the $105 plus any additional contributions you make. It is like a snowball rolling down a hill, growing bigger over time. The earlier you start contributing to your RRSP, the more time it has to grow.

More Than Just Retirement

Your RRSP can be used to help you purchase your first home or fund your education. Through the CRA’s Home Buyers Plan, you can withdraw a portion of your RRSP to put toward a down payment on your first home. Similarly, the Lifelong Learning Plan allows you to withdraw funds from your RRSP to pay for education for yourself or your spouse. With both of these programs, you will need to repay the funds that have been withdrawn from your RRSP over a period of up to 15 years to avoid paying tax on them.

Tax Deductions

When you contribute to your RRSP, you will receive a tax deduction that reduces your taxable income. For example, if you earn $100,000 that year, and you contribute $10,000 to your RRSP, your taxable income will be $90,000.

At tax time, this deduction could mean the difference between paying, receiving a refund, or breaking even. If you want to contribute for tax purposes but do not have the extra money, you could take out an RRSP loan. By borrowing an amount close to your expected tax refund, you can use the refund to quickly pay down the loan. In effect, you’re directing your money toward your own savings instead of sending it to the government in taxes.

In addition to the tax deduction, any money that is inside your RRSP grows on a tax-deferred basis. This means interest can compound over time without being taxed each year. You will be taxed when you withdraw funds from your RRSP, typically in retirement. However, most people are in a lower tax bracket after they stop working, which means the tax on withdrawals is often lower than the tax they would have paid on that income during their working years.

Building Good Habits

Another great reason to start early is to develop strong financial habits that will stick with you as you grow older. Establishing a routine of contributing even a moderate amount, such as $20 a pay period, adds consistency and structure to your finances. As your career progresses and your income grows, you can increase your contributions and investments, giving you greater financial stability for the years to come.

Once you start working, the earlier you open an RRSP, the better, but the main thing is to start. Take small – but easy steps today to build a brighter future. Connect with one of our Sunrise team members and let’s get started.