Tis the season... for financial planning Unsecured debt: 97.62% Hi-lo fund: 0.81 months

Howdy all!

I was sent an email this morning about RRSP's so that sparked me to share some info with you all that I wrote a while ago but that I haven't posted to this blog and figured it may be useful to some of you out there. 

The Basics of RRSPs

What is an RRSP?

An RRSP is the common name a Registered Retirement Savings Plan, a program designed by the Canadian government to promote personal savings for retirement. 

How does an RRSP work? 

The basis of an RRSP is that any money that you contribute to the RRSP is not included in your taxes until it is taken out. So basically if my income is $35,000 a year but I contribute $5,000 to RRSPs when I file my taxes the government only recognizes $30,000 of what I made as taxable income. The remaining $5,000 will be taxed when I withdraw it from the plan years down the road. 

Further than that RRSPs also grow tax free which means any money you earn (interest, dividends) on the money in your RRSP is not taxed until it is withdrawn. 

How much do I save?

Because RRSP contributions reduce your total income the tax savings that they give you are dependent on the tax bracket that you are in. For example in Saskatchewan someone who earns under $40,000 pays about 26% in income tax that means that if you save $5,000 in and RRSP you will save $1,300 in taxes. It’s basically a reward for saving, by being a good steward the government will give back or let me keep $1,300 that they would normally have taken.

Other bonuses

The government of Canada has created programs to make even more use of your RRSP savings. The first of which is called the Home Buyers Plan (as a realtor this is my fave) which allows you to borrow up to $25,000 against your savings  to use as  a down payment on your first house. You then have 15 years to repay it with no tax implications. 

The second is the Life long learning program which will allow you to borrow up to $20,000 ($10,000 max per year) in order to finance training or education for you or your spouse. 

The Numbers

Ok so it might only seem like a couple hundred dollars a month but for someone working full time making $15 an hour and putting 10% of it away which is $120 every 2 weeks at the end of 20 years earning 5% interest (very conservative estimate on return) you would have $107,058. But it doesn’t stop there because you are contributing to an RRSP you will have tax savings of $811.20 year (120x26x.26) totaling $16,224 over the 20 years. Re-invest those tax savings into your RRSP and after 20 years you now have $134,715.  Not too shabby for under 10 bucks a day and remember you wont be making $15 an hour forever either as you earn more increase the your contributions and watch your savings multiply.

Hope this helps and if you ever have any more questions never hesitate to ask :-)

Till next time, Plan to Prosper!

David Whitrow
Royal Lepage Regina Realty and Trademark Homes


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