RRSP: A Guide to Building Your Retirement Savings

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RRSP A Guide to Building Your Retirement Savings
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What is an RRSP?

• Retirement saving is a key component of financial
  security, and the Registered Retirement Savings
  Plan (RRSP) can be one of the most powerful ways
  of saving in Canada. By no means is an RRSP a
  savings account but a method for proactive
  retirement saving. When Canadians make plans for
  their financial well-being in the long term,
  knowing how to contribute to an RRSP and how an
  RRSP can help you is vital.
• RRSP Registered Retirement Savings Plan is
  available to all working Canadians up to age 71.
  Can you file a photo of RRSP staring retirement
  in the face? That plan exists to give you a
  tax-deferred savings account for your retirement
  Your contributions to your RRSP are deducted from
  your taxable income (in most cases, decreasing
  your yearly income and, therefore, your yearly
  tax bill).

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Why Invest in an RRSP?

• For Canadians, contributing to an RRSP isn't just
  about saving taxes now but rather growing a
  basket of money sheltered from taxes until
  retirement. As long as those funds stay within
  the plan, any interest, dividends, or capital
  gains that the money that you have in the plan
  earns grow tax-deferred within the account. Then,
  when you are in retirement and you are starting
  to take the money out, it will be at a lower tax
  rate, i.e., your marginal tax rate.

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Determining How Much to Contribute

• One of the key things to understand is the
  contribution limit for an RRSP. It is generally
  18 of your earned income from the previous year
  to a predetermined maximum limit each year, as
  set by the Canada Revenue Agency (CRA). As an
  example, the maximum amount for 2021 was 27,830.
  Before heading to a mortgage company or mortgage
  broker, be sure to determine today's max based on
  the previous year, run the numbers on your own,
  and check the latest figures.

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Real-life Scenario

• For example, an engineer who is 40 years old
  named John receives a Notice of Assessment from
  the CRA and needs to look up an RRSP deduction
  limit for this year. When John goes over his
  finances, he turns to an RRSP Quote tool online
  to decipher how much he ought to be saving for
  his age, income, and retirement dreams.

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Benefits of Maximizing Your RRSP Contributions

• Making the most of your RRSP contributions can
  have a huge effect on your retirement savings in
  a couple of ways
• Tax Benefits Although you may not claim a tax
  deduction for your contributions, you will pay no
  tax on the account balance or its earnings when
  you withdraw the money.
• Delaying tax You will have to pay tax on your
  RRSP at some point, but for now, you get to
  reinvest all the taxes you would have paid in the
  meantime as a result of having a larger amount to
  invest after all, compounding growth.

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RRSP for Canadians Choosing the Right Investments

• An RRSP is like a basket that can include
  different investments such as stocks, bonds,
  mutual funds, ETFs, and GICs. The appropriate
  blend of investments varies depending on your
  risk tolerance, time horizon, and financial
  objectives. Having a diversified portfolio will
  help mitigate risk and return lower growth over
  time.
• Example
• Sarah, a sophisticated investor, monitors a
  portfolio of equity and bond mutual funds within
  her RRSP. She tweaks her strategy a bit as the
  market moves and as her retirement draws near,
  adding bonds to cut risk just as she ages closer
  to her retirement date.

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When to Start and How Much to Invest

• Getting off to an early start has an enormous
  benefit on the size of your retirement savings,
  thanks to the effect of compounding interest. The
  quarterly and monthly contributions of 500 add
  up over decades of investing in your RRSP. But,
  how much, exactly, you should put in will be a
  function of your own finances and your retirement
  goals.
• Case Study
• When he was 25, Mike began making a small
  100-a-month RRSP contribution. Even if he earns
  only 5 of his money, by the time he's ready to
  retire at 65, his savings will grow to a hefty
  sum, proving the importance of time and
  consistency!

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Withdrawing from an RRSP

• While RRSP withdrawals are generally intended for
  use in your retirement years, you can make them
  under one of two plans the Home Buyers' Plan
  (HBP) and Lifelong Learning Plan (LLP) without
  immediate penalties (as long as you repay the
  amount withdrawn).

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Conclusion Getting an RRSP Quote

• An RRSP Quote customized for you can be a good
  first step in telling you how much you need to
  save according to your personal financial
  situation and plans. There are several resources
  available from financial institutions and
  advisors that can help you protect your
  retirement savings and adjust your plan
  contributions accordingly.
• And finally, an RRSP is a tool to be used in your
  retirement planning arsenal, offering tax
  benefits, investment growth, and financial
  security. If you are early or late in your career
  it is not too late to start planning for the
  future and invest in an RRSP. Begin with a quote
  on RRSP today, review your finances/goals, and
  take charge of your financial future now. Every
  contribution is a step toward a more secure and
  comfortable retirement.