Registered Retirement Savings Plan (RRSP) 10-Point Overview (The Basics)

 

1. Start ASAP with any earned income

The minute you get a T4, or have any ‘earned’ income, max out your RRSP, at ANY AGE. Even babies appearing in commercials with cheques made out to them, can claim that as earned income.

I am even considering hiring my son in the future to do scanning and grunt work for me (organizing my files), and to pay him minimum wage, to get him some RRSP room as well. I’d have to set up payroll so I am less keen on doing it. I may consider having him do other chores or even pick up summer jobs before he is 16, mowing lawns or whatever, and claiming that as self-employed income so he can claim an RRSP contribution.

Pondering it.

2. Max it out (that’s your goal)

If you can. If you can’t, aim for it. 18% of anyone’s pay, is a hefty chunk of money, but in my opinion, the MINIMUM you need to save and invest to have a decent retirement. 10% is no longer enough, and especially if you don’t invest it.

Max. This. Out. Aim for it.

I didn’t do that when I was $60K in student debt, because I was trying to clear my debt, but I did do the employer RRSP match at 100%, because it was free money, and that was about $7000 a year, and my contribution room was $11,700, I was off by $4700.

Once I cleared my debt, I maxed my RRSP as soon as I could.

3. Don’t touch it at all if possible

People withdraw from it for home purchases or for education (using the government plans), but if you take out the $35K for a home (as of 2020) under the Home Buyer’s Plan, for the entire time (10 years is the max) that the money is out and in a down payment for a home, you are losing out on the compounding interest from having invested it for that period of time.

THAT, is why you shouldn’t touch it if possible. Leave it invested, save an extra down payment outside of your RRSP.

4. If you use it for your home or education, pay it back ASAP

But of course, we are not all made of money. If you do take out the money for schooling or a home, pay it back ASAP. Don’t do it over the decade, of $3500 a year, try and max out the repayment as soon as you can, rather than taking the full 10 years. The sooner it is invested back into the market, the better.

5. Don’t convert it to an RRIF until you’re 71

A lot of people talk about retiring early, even if you retire at 65 or so, and want to immediately convert it to a Registered Retirement Income Fund (RRIF) but that pigeonholes you into being forced to withdraw that amount from the fund until your death. Why not leave it in an RRSP and let it grow, maybe if you decide you want to work again until the age of 71, you can, and contribute more towards it?

Why block off your options by converting it early? Wait until the very last minute and leave all your options open.

6. Buy investments for the long term

RRSPs are not for speculation. You can’t replenish it with money that you’ve lost betting on stocks. Buy index mutual funds in here, and hold them forever until retirement.

7. Stick U.S. stocks and funds in $USD here

With the U.S. Tax treaty between them and Canada, you can put $USD stocks and funds in here (held in U.S. dollars), and not have to pay that massive withholding tax to the U.S., because it’s in an RRSP (and for them, $CAD Canadian dollar stocks and funds, they can be in a 401K and THEY don’t pay major withholding taxes).

You can convert $CAD to $USD for cheap using Norbert’s Gambit.

8. Designate a beneficiary

Never forget to do this. Your spouse, kids, whomever. NAME A BENEFICIARY or else it goes to probate and you will have it as part of your estate, tangled up and possibly taxed more.

9. Don’t put it into savings or GICs

Please. I know it says “savings” in the name, but … this is such a misnomer. It should be named: Registered Retirement Investing Plan (RRIP), frankly. DO NOT save money in here in cash earning a piddly 2% in a high interest savings account (or less).

If you go into a bank and say “I want to invest in an RRSP”, they will buy a GIC for you (Guaranteed Investment Certificate), which is pretty much like a locked in high interest savings account. PLEASE DO NOT DO THIS.

INVEST IT in the stock market, and buy index mutual funds.

10. Defer RRSP tax credits appropriately

If you have RRSP room from when you make a little income (e.g. younger teen earning years, or early career years), max out your RRSP, and save the credits to carry forward and defer it to future years where your income is higher, and the tax credit will be significant to drop your taxes down so that your tax bracket is not as high.

Basically, tax credits from your lower income years should be used to buffer the higher income years to save even more money.