I have been working for a few years now and heard about RRSPs and the benefits, but still don’t know how to actually start. Do I just open a new account with my bank, like I did for chequing, and transfer money into it every month? Where do I open an RRSP account and how do I contribute to it?
Registered retirement savings plans (RRSPs) are a great way to start saving for the future. The benefit to an RRSP is that the money you put into the RRSP gives you an income tax credit. This means if you deposit $5,000 in your RRSP account you get taxed as if you made $5,000 less that year. Typically this means you’ll get a larger refund when you file your income taxes (or a smaller tax bill).
When you withdraw money from your RRSP you do get taxed as if the money you were withdrawing was income. For this reason, people usually deposit money into their RRSP when they have a high income (resulting in a better tax break) and withdraw money from their RRSP investment when they have little-to-no income, for instance when they retire.
As to how to get started with your RRSP account, the process is usually similar to opening a bank account. An RRSP is not a bank account, but the process of opening one will probably feel familiar.
Typically the easiest way to get started is to make an appointment at your current bank and ask them about their investment options, specifically RRSPs. They’ll help you get started, set up an account, and (optionally) help you set up automatic deposits into the new RRSP account.
If you’re not keen on using your bank to also manage your investments, for whatever reason, you can open just an RRSP account with other financial institutions. Most banks offer RRSP accounts you can set up by visiting your local branch. You can also check out alternatives such as EQ Bank and Tangerine which offer on-line only services, usually with higher interest rates than traditional banks. These financial institutions will help you set up an RRSP account with a few short steps on-line and you’ll be able to deposit funds into your retirement savings account.
Before you begin depositing money in your RRSP account, please be aware there is an upper limit to the amount you can contribute to an RRSP. The amount is (roughly speaking) 18% of your last year’s income, plus any RRSP room you had left over from previous years. Each year, when you file your income tax paperwork, the Canada Revenue Agency (CRA) sends you a form called a Notice Of Assessment. This form will list the maximum amount you can contribute to your RRSP that year. You can visit the CRA website which has details on how your RRSP contribution limit is calculated. It also explains what penalties you may face if you try to deposit more than your allowed amount.
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