Okay, what are they? To clarify, an RRSP are not mutual funds, but they can HOLD mutual funds. They are akin to the States’ 401 K.
Think of it as a grocery basket. Mutual funds, GIC’s (guaranteed income certificates), stocks, bonds all go into this grocery basket.
A non-registered account is like another grocery basket that holds the same items, BUT the downside is that any income you make on it is fully taxed.
I know I know, you’re thinking “hey but I’m only 24, why the heck do I need to think about retirement?? You may not be thinking about retirement now, per se, but you can start thinking about buying a home (Home Buyer’s Plan) OR going back to school (Lifelong learning Plan) in which case you can withdraw $25,000 from your RRSP for FREE- as long as you pay it back within 15 years (we’ll talk more about this later– stay tuned).
The RRSP is like a “vehicle” (the financial people like to use this term) in which you can defer your taxes. You don’t pay tax on your income now, but when you take money out of it, you pay the taxes. The gist is that most people take money out of their RRSP’s when they retire, hence lower income, and lower taxes.
So what that means is, the government encourages us to save; and is giving us free money!! (really, we’re taxed to the nines, so we should definitely take advantage of this when we can). So why aren’t more people taking advantage of it? (Statistics show that only about 25% of Canadians contribute to an RRSP). Beats me. I suggest you don’t be that statistic.
AND another bonus is that investments in an RRSP grow tax sheltered, so it’s like hitting two birds with one stone! You get money back for contributing, and the money you have in it doesn’t get taxed, so it’ll grow faster.
You can see how much “RRSP contribution room” you get from your Notice of Assessment. You get more tax refund (can you hear, ka-ching?) when you contribute to an RRSP, it produces a “tax credit”. Basically, your goal is to contribute (or max it out) to your RRSP when you have higher income. For example, when you’re a student, you don’t make that much money, and you don’t get taxed that much—so you wouldn’t really get much money back from your RRSP tax credit.
Now that you’re all excited about RRSP’s, you’re probably wondering how much you can contribute.
For the 2007 tax year people can contribute 18% of their income, up to a total of $19,000, but if you have a pension adjustment, you have to subtract that. Just check out your Notice of Assessment, you’ll see it there.
The Canadian Govennment has a more dry explanation of what is means:
Next time, I’ll talk more about what to pick to hold in this awesome grocery basket.