How Can an RRSP Help at this Stage of your Life?
The Financialist • Issue 104 • January 2010
BY VERA VLAOVICH BA CFP CDS
RRSP season is here again. For most of us, RRSPs may be an ideal retirement savings tool. Most individuals who file a tax return have begun to build up RRSP contribution room. You’ll need to check your CRA Notice of Assessment for the 2008 tax year to see how much you can contribute for 2009. Also, you may have carried forward contribution room from previous years if you have not been regularly maximizing your annual RRSP contributions.
For the 2009 tax year, the annual contribution limit is $21,000 and in 2010, it is $22,000. March 1st, 2010 is the deadline for contributions to be claimed on your 2009 tax return.
Two current retirement savings topics that may be of interest are:
1. Start Early- “The 8th Wonder of the World”
So why would you start regularly investing in an RRSP in your 20s versus leaving this until your 30s or later? Let’s take a look at twins, Jean and Kevin.
• Jean starts investing at age 20 and puts $3,000 a year into her RRSP. Then at age 34, she stops contributing.
• Her twin brother, Kevin, does not worry about the RRSP and decides he will start contributing to his later, at age 30. He then puts in $3,000 a year for the next 34 years (to age 64).
This RRSP comparison assumes that each of their portfolios will grow an average of 6% annually. Fast forward 45 years later to 2054, and how much is in each of their RRSPs?
• Jean: this twin has contributed $42,000. The value of her RRSP using the above criteria would be $383,826.
• Kevin: her brother has contributed $102,000. Using the same criteria, Kevin’s RRSP value would be $331,304. Kevin contributed $60,000 more than Jean and his sister ends up with over $52,000 more in her RRSP when they turn 65! Albert Einstein referred to this as “The 8th Wonder of the World” – known as the magic of compounding on investment returns. The earlier you start, the less you’ll need to put in to achieve a specific future amount.
2. What are some of the key differences between an RRSP and a TFSA? Which would be better for me?
RRSP
RRSP contributions are tax-deductible and help reduce your taxable income. Employment income is required to build up annual RRSP room.
Your allowable contribution is the lesser of:
• 18% of your earned income from the previous year; or • the maximum annual contribution limit for the taxation year (i.e., $21,000 in 2009)
• your remaining limit after any pension plan contributions – as set out in your CRA Notice of Assessment.
Withdrawals from an RRSP are always fully taxable and added to your current income.
TFSA
TFSA contributions are not tax-deductible and don’t reduce your income for tax purposes. No employment income is needed to contribute. You can contribute up to $5,000 per year.
TFSA withdrawals are exempt from tax. Should you take out the money, you’ll be able to re-contribute an equal amount at a later date.
In both the RRSP and TFSA, if you do not contribute to your full annual limit, you can “carry forward” the remaining amount and it is added to your limit for the following year. For example, if your RRSP limit for 2009 is $15,000 and you put in only $10,000, you will be able to ‘carry forward’ the other $5,000 to 2010 or later.
In the case of the TFSA, if you do not contribute $5,000 in 2009, you will be able to invest $10,000 in 2010 ($5,000 from 2009 + $5,000 for 2010).
Which is a better choice for you... contributing to your RRSP or TFSA? Ideally, you should do both. However, if you need to choose one over the other, why not contact your Financial Advisor? We will then consider your tax rate, current income, and related financial issues and we can decide together what is best for you and your unique situation.
Last, if you have not yet contributed to your RRSP for 2009, give serious consideration to completing this well in advance of the Olympic Games.