RRSP stands for Registered Retirement Savings Plan. It is the self-directed retirement savings plan in Canada. All citizens can contribute up to 18% of their gross income each year, to a maximum income of
$100,000 edited: $127,611. Therefore, your gross income that you contribute to your RRSP is not taxed. Instead, it will be taxed when you withdraw from the account in your retirement. Therefore, experts generally suggest
you should not contribute to your RRSP if your income is below $50,000 per year
Especially if you’re young and will likely earn more in the future, at which time those tax deductions will benefit you considerably more than they will in your early 20’s. If make less than $50K but you’re concerned about missing out on the “magic of compounding” (I hate that phrase), then you really should
max out your TFSA in full before you drop a cent into your RRSP
If your TFSA is already maxed out, start a second savings account and begin accumulating the $5,000 for next year’s contribution. Drop it in on January 1st of the New Year and begin again. If this is too easy then you’re probably getting close to an income that would justify RRSP contributions, but if you’re still far from the $50K mark and you expect to reach that milestone in your working lifetime, don’t do it. If you are just obsessed with the RRSP vehicle and want to use it even if it’s not to your advantage then go ahead and
put money into your RRSP but don’t claim the deduction — save it for future years
In 2010, I dropped $2,500 into my RRSP and I still haven’t claimed the tax benefit for it. Why? I haven’t needed it yet. In both 2010 and 2011, my income was below $50,000. Furthermore, I had tens of thousands of tuition deductions I had yet to use up. Even now I’m confident that unused tuition deductions, charitable contributions, and student loan interest credits, will keep me from claiming that $2,500 RRSP contribution for another year. Additionally, my employer pension counts towards my RRSP contributions. If I was contributing regularly on my own, I’d probably be careless enough to over-contribute.
Now that I’m headed towards higher earnings and shaking free of my student debt, one of my primary financial focal points will be minimizing my taxes. I’m not contributing to my RRSP (on top of my employer contribution) until its in my best interest tax-wise to do so.