It’s important to start thinking about a long term financial plan as early as you can, and for many people RRSPs will be a big part of that. So here are six quick facts about them that can give you an edge in your financial plan courtesy of The Globe and Mail.
Use it to pay your mortgage
Most people know first time home buyers can use their RRSP to help with their down payment. But do you know you can also use it to finance your mortgage provided your RRSP is large enough? It’s called a non-arm’s length mortgage. With it you borrow from your RRSP to finance your mortgage and then pay yourself interest. Unlike regular mortgages where you’d be looking for the lowest interest rates, you’d actually want to go with a higher rate so that you’re paying yourself back more.
You can save contributions for later
Chances are if you’re fresh out of school and starting your first job, you don’t have an RRSP yet. And that might not be a bad thing.
While getting started saving as early as possible is generally recommended the benefits of RRSPs aren’t as great when you don’t have a huge amount of money coming in. The cool thing about them is that if you don’t max out your contributions the limit carries over indefinitely. So when you’re in a lower tax bracket you can save up your contribution until the tax savings are better.
It’s not just about the refund
One of the nicest perks of RRSP contributions is that they will get you a nice tax deduction but RRSPs should be about saving. Keep in mind that you will eventually need to withdraw these funds and when you do you will be taxed. You really aren’t going to save any money unless you’re in a lower tax bracket upon withdrawal than you were upon contribution.
It’s usually more useful for higher income earners
However, the benefit is always better for high income earners, who can defer taxes for when they retire and withdraw the taxes with a lower tax bracket than they would if they were still working.
For those in lower tax brackets, RRSPs may not be as good a solution as tax free savings accounts (TFSAs), which may not provide any tax reduction, but will at least still provide tax-free growth.
Split with a Spouse for maximum benefit
Taxes should be a big concern for anyone heading into retirement. if you aren’t careful you can find your pension being eaten up by taxes when you pull them out of your RRSP.
However, splitting your pension with your spouse will reduce your combined tax bill and for many people that makes the idea of spousal RRSPs obsolete. However, for families without workplace pensions, a spousal RRSP makes perfect sense. If one spouse works while the other stays at home it’s recommended to open an RRSP for the earner as well as one for the spouse.