You might think you’re too young to need an RRSP. But this is one savings plan that is a firm foundation for a lifetime of financial security.
Despite its name, you can use the Registered Retirement Savings Plan (RRSP) for more than just retirement. It can help you with everything from going back to school to buying your first home. Here’s why setting up an RRSP while you’re young is one of the best investments you can make.
What is the Registered Retirement Savings Plan?
The Registered Retirement Savings Plan is a tax-advantaged account to help Canadians save for retirement.
When you contribute money to an RRSP, your investment grows tax-deferred until you make a withdrawal, typically at retirement. Many people have a lower income in retirement than their working years. Making RRSP contributions while you’re young can reduce your lifetime income tax bill.
But the RRSP isn’t just for retirement. It’s more flexible than you might think. You can also use your RRSP to go back to school or put a down payment on your first home. There’s more than one good reason to open an RRSP while you’re young.
4 reasons to set up an RRSP while you’re young
You can open an RRSP as soon as you have taxable income. Unlike the Tax-Free Savings Account (TFSA), which you have to be 18 to open. You can start your RRSP as soon as you have your first job.
Most people won’t open an RRSP as soon as they get their first paycheque. But the sooner you do, the better.
The habit of saving is easier to start when you’re young
The prospect of saving seven-figures for retirement can be daunting. The sooner you start, the more likely you are to hit your target. It might be tempting to start saving for retirement after you’ve paid off your debts or bought a house. But you can’t afford to procrastinate.
It’s difficult to switch gears from repaying a debt to saving money. Debt is an obligation. You have to pay it or there are consequences like debt collections and dings to your credit score. No one is going to come after you or penalize your credit score for not saving money.
It’s enough to save a small amount like $50 or $100 when you begin. Open an RRSP and set up an automatic transfer that coincides with payday so you never miss a contribution. As your RRSP balance grows, you’ll have increased financial security for the future. You’ll also have a few options to use the money towards different financial goals.
Use your RRSP for a house down payment
You can withdraw up to $35,000 from your RRSP for a down-payment on a home under the First Time Home Buyer’s Plan (HBP).
The HBP is like a loan to yourself. You withdraw the money from your RRSP to make a down payment on your home. Then you begin paying it back 1 calendar year after you move into your home. You’ll have 15 years to repay the amount you borrow from your RRSP.
If you withdraw the full $35,000, this works out to $2,333 per year or about $200 per month. You can continue to make contributions to your RRSP for retirement while you repay the HBP. You have to specify how much you’re putting towards each when you file your income taxes.
Homeownership is often a cornerstone of many people’s retirement plans. Using your Registered Retirement Savings Plan to buy a house makes a lot of sense.
Use your RRSP to go back to school
Similar to the First Time Home Buyer’s Plan, the RRSP Lifelong Learning Plan (LLP) lets you withdraw money from your RRSP to attend school.
You can withdraw up to $10,000 per year from your RRSP to a lifetime maximum of $20,000 under the Lifelong Learning Plan. You can use this money to pay the qualifying costs associated with going back to school. Are you enrolled full-time in a qualifying educational program at a designated educational institution? If you are, as a Canadian resident you can use the LLP to help with the cost of tuition, fees and textbooks.
You’ll have 10 years to repay the amount you borrow from your RRSP under the Lifelong Learning Plan. Your repayment begins a year after you graduate from your program.
What happens if you borrow the full $20,000 under the LLP? You’ll have to repay $2,000 per year or about $167 per month. You can make contributions to your RRSP for retirement while you repay the LLP. But you have to specify how much you’re putting towards each when you file your income taxes each year.
Increasing your level of education often leads to increasing your income. Therefore using your RRSP to go back to school is a way of investing in yourself and your earning potential. Ideally, you’ll pay back the money you borrowed under the LLP. And you’ll save even more in your RRSP when you move up in your career and earn more income.
You can use it for retirement
Surprise! Your RRSP is also great for exactly what it’s for in the first place: saving for retirement.
Opening an RRSP when you’re young is a great way to start building your nest egg. Even if you don’t have much to set aside, every dollar counts in the long term!
This post was sponsored by SunLife but all opinions expressed therein are my own.