Opening your first RRSP is like going on a first date: It feels a little uncomfortable, the other party provides too much information, and ultimately you'll need to make a decision.
Before you take the plunge, you need to understand what you're getting into. The RRSP (Registered Retirement Savings Plan) is often called the "Great Canadian Tax Break."
Anyone who files a tax return can open an RRSP, and claim a deduction that allows them to defer taxes. The amount that you can contribute will depend on your earned income, but there are limits. The ceiling for 2010's RRSP contribution -- which isn't an issue for most young investors -- is $22,000.
To find out your own RRSP contribution room, look at the notice of assessment or notice of reassessment you received from the Canada Revenue Agency, or check out the tax collector's website for more information.
The benefits of opening your RRSP sooner rather than later include:
Tax savings: You are going to pay taxes your entire life, so it's never too early to open a registered account that enables you to pay less. For instance, if you make $40,000 a year and contribute $200 a month to your RRSP, you will save $580 in taxes because of the deduction.
Home Buyers' Plan: You don't have to choose between buying your first home and investing in an RRSP. You can withdraw $25,000 from your RRSP, tax-free and interest-free, and put it toward your first home. You have 15 years to pay the money back to your RRSP without penalty, starting two years after you take the money out. Click here for more on the Home Buyers' Plan
Lifelong Learning Plan: If you or your spouse decide to go back to school, you can withdraw a maximum of $20,000 to pay for tuition and living expenses. You then have 10 years to pay back your RRSP, starting on the second year after you finish your full-time program. Click here for more on the Lifelong Learning Plan
Good investing habits: If you are just starting out as an investor, your RRSP is likely to be your starting point. It will help you get in the habit of putting some of your earnings aside for the future.
Learning about yourself: With your RRSP, and depending on whether you choose higher-return, higher-risk investments such as mutual funds, or safe but low-yielding GICs, you will begin to understand how it feels when you make money and lose money. This will ultimately help you decide what kind of investor you are and how much risk you are willing to accept.
Compound investment growth: A huge advantage for young investors is that your money has time to grow without getting taxed along the way. RRSPs can be held until Dec. 31 of the year that you turn 71. If you're in your 20s that translates, into four to five decades of tax deferral.
 |
|
 |
|
| Patricia Lovett-Reid | |
|
|
|
|
|
The earlier you start contributing to an RRSP, the bigger the bang for your buck. "If you're 25 and you contribute $100 a month to your RRSP at a rate of 6.8 %, by the time you're 65 you will have saved approx $234,500, and you will have only invested $48,000. That is the magic of compound interest," says Patricia Lovett-Reid, a senior vice-president of the discount brokerage TD Waterhouse.
By comparison, Lovett-Reid adds, if the investor waited until age 30 to start an RRSP, and made the same monthly contribution, he or she would have only about $163,500 by age 65, or $71,000 less.
Another way to get more out of your RRSP it to check whether your company offers a group RRSP that matches employee contributions. For example, if you contribute $100 a month to your RRSP, and your company matches your contribution, the value of your investment automatically doubles.
"One problem we see is that when graduates go into their first career they don't take advantage of their employee options," says Trish Domingo, an investment and retirement planner with RBC Financial Group. "So look into your company's options, whether it's matching pension plan contributions or stock options."
 |
|
|
|
| Trish Domingo | |
|
|
|
|
|
One massive stumbling block for young investors is student debt. Should you pay off your loans first, and open your RRSP later?
"It depends on your goals. If you really want to get rid of your student debt it's never a bad idea to pay it off aggressively," says financial planner Alim Dhanji, a CFP with Assante Financial Management in Vancouver. "But if you can handle paying a minimum payment on your student loan, then contributing to an RRSP, essentially you can use your tax savings toward your debt."
Financial planners agree that the one distinct advantage young investors have compared to older investors is time. If you're just getting started, there's a lot of information to try to digest, so take your time to research your investment alternatives. But don't procrastinate, since you don't want to miss out on the power of compound interest.
