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RRSPs: Let’s separate truth from myth!

Is a Registered Retirement Savings Plan (RRSP) used only for retirement? Can it be used to purchase property? Do RRSPs generate low returns? There are many myths about RRSPs. Here are a few facts from  La Capitale’s blog to help you distinguish truth from myth!

1. The money invested in an RRSP can be used for more than just your retirement.

Even if it was created to help you save for your eventual retirement, the money you contribute to an RRSP can be used before retirement, for other needs: Here are two examples:

- Buying your first home through the Home Buyers' Plan (HBP).

- Go back to school using the Lifelong Learning Plan (LLP).

2. RRSP contributions are not the only way to start saving.

It’s vital to start saving as early as possible. However, the savings vehicle should be selected based on your financial situation.

For example, if you’re a student in a low-income, non-taxable bracket and still wish to put some money aside, it would probably be wiser to open a Tax-Free Savings Account (TFSA) rather than contribute to an RRSP.

3. You can contribute to an RRSP before age 18.

If you're in a higher income bracket and can afford to do so, you can contribute to an RRSP when you file your first income tax return. Contrary to the TFSA, there is no minimum age to invest in an RRSP.

4. The return on your RRSP depends on the investments it contains.

You can compare an RRSP to a sealed container in which you place your investments to shelter them from taxes. Therefore, the return on your RRSP depends on the investments you choose to include in the plan, based on your investor profile and the type of investment that suits you best.

5. There is no minimum annual contribution requirement.

Have additional expenses or a lower income this year? You don’t have to contribute to your RRSP each year, nor do you have to contribute a minimum amount. Your contribution room – which can go up to 18% of your previous year's income – is simply transferred to the following year.

However, remember that it’s very important to have a savings plan that is in line with your retirement. To maximize your chances of reaching your goals, you should ideally invest a fixed amount every year. Two great tips to help you get there easier: Make pre-authorized periodic payments and contact a financial security advisor to develop a sound savings plan.

6. To maximize your tax savings, you’re better off waiting for retirement before you withdraw any money from your RRSP.

As long as you have an employment income, your tax rate is higher than at retirement. This is when it’s more beneficial for you to contribute to an RRSP because the amount you invest is deducted from your taxable income. However, it’s the worst time to make withdrawals from your RRSP, because those sums would be added to your income, meaning you would be in a higher tax bracket.

At retirement, your income is logically lower and so is your tax rate. It’s therefore the ideal time to withdraw funds from your RRSP, since you will normally be paying taxes on a lower income, at a lower tax bracket.

When you think RRSPs, think La Capitale.

La Capitale financial security advisors1 are highly experienced and use the cutting-edge tools needed to help you plan a complete savings plan that meets your actual needs. Take advantage of their RRSP expertise!

1. On behalf of La Capitale Financial Services Inc., Financial Services Firm