All about RRSPs

How they can help you save for retirement and dodge the taxman

One way to get your kids to save money is to top up their piggy bank: They put in a dollar and you add 50 cents. Think of an RRSP as a similar bargain for you: Drop in a deposit and reap a juicy tax break, courtesy of the government. The deadline to contribute this year is March 1. Here’s a rundown of the basics:

How do RRSPs work? A Registered Retirement Savings Plan is an account that helps you save for your life after work. The money you contribute is deducted from your taxable income, so the more you put in now, the bigger your tax refund in the spring. You can generally contribute 18 percent of your income, up to $21,000 annually.

Should everyone contribute? If you and your spouse earn about the same, you should both have RRSPs. However, if one of you earns substantially more, you’ll maximize the benefits if the spouse with the higher income contributes, says Tina Tehranchian, a certified financial planner in Richmond Hill, Ont. Simply put, the more you earn, the more tax you pay, and the more you could save by contributing.

That said, every family goes through lean years and if you feel there isn’t enough left over after covering daycare, the car payments and a surprise house repair, skip this year. You’ll be able to make up for it down the road, when your fixed expenses aren’t so high.

How do I set up an RRSP? Many banks let you do it over the phone, or even online. The more difficult question is how to invest the money. You can put it into a savings account, guaranteed investment certificates (GICs), mutual funds, stocks or bonds.

Your bank will likely suggest mutual funds, which are baskets of stocks or bonds (or both) managed for you by a professional. Trouble is they often carry high fees. If you’re new to investing, consider a high-interest savings account or GIC. You won’t get big returns but, unlike mutual funds, you won’t be risking a drop in your investment.

Where do I find the money? Coming up with a few thousand bucks is tough, especially after the holidays. Try setting up an automatic withdrawal from your chequing account each month, says Lise Andreana, a certified financial planner in Burlington, Ont.

What about my mortgage? If your mortgage rate is only four or five percent, you may be better off putting extra money into an RRSP. On the other hand, if your rate is high, chip away at your home loan first.

Or do both at the same time, suggests Jim Yih, a financial expert and speaker in Edmonton. Say you put $3,000 into your RRSP and get a tax refund of $1,000. You can put that extra money toward your mortgage and meet two financial goals at once. The trick, Yih says, is not to spend your refund on something frivolous. “For most people, that’s the hard part.”

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