A Millennial’s Guide to the RRSP

 

The Registered Retirement Savings Plan (RRSP) is like the TFSA’s older, more complicated, more obsessed-with-the-tax-system sister, which is why I put together this millennial’s guide to the RRSP. (If you’re looking for a millennial’s guide to the TFSA, it’s here.)

I’ve gotten more questions and confused, glazed stares when I talk to other millennials about the RRSP than just about anything, because for real, even if you’re a money nerd like me it can be seriously hard to figure out if you’re using the RRSP properly, and when you should use it.

Before we can get to that – aka the real-life reasons you should be using it, and how it’ll impact your life if you do – we should dive into the basics.

Which, I’ll be totally honest, aren’t nearly as basic as they were with the TFSA.

We’ll get through it together, friends. (And it really isn’t that bad, once all is said and done. You’ll see!)

The Basics

Here are the fast facts you need to know about the RRSP, whether you have one or you don’t.

Definition

A Registered Retirement Savings Plan (RRSP) is an account that you open with a financial institution, that is registered with the government, and that can be used to save for your retirement (duh). Generally speaking, contributing to an RRSP will reduce your taxable income in the year that you contribute.

Say what now? Reduce my taxable income? Read on, friends.

Contributing to an RRSP

  • The amount you can contribute to an RRSP is tied directly to your income as reported on your tax returns, and it accumulates if you don’t use all of your contribution room every year.
  • Yes, this means that if you filed your taxes when you had your high-school part-time job, you accumulated RRSP contribution room then, too.
  • Your contribution room is either 18% of your pre-tax salary, or $25,370 in 2016, whichever is lower (lol it’s the salary one, let’s be real, this is a guide for millennials.)
  • You keep your contribution room until you use it, and it’s carried forward on your tax return every year.
  • If you have a pension plan at work – either a defined benefit plan or a defined contribution plan – it will directly reduce the amount you can personally contribute to an individual RRSP. (This is a good problem to have, and your plan should be able to tell you your “pension adjustment” amount to help you identify how much you can still contribute.)
  • You can always find your up-to-date contribution room on your CRA account, or check how much you had as of your last tax return by looking at the statements you got in the mail.
  • Your RRSP contributions are made with pre-tax dollars. (This is where the tax refund bit comes into play.) If you contribute $1000, and you make that contribution out of your paycheque, tax has already been withheld on that money. When you put it into an RRSP, the government agrees to give you back the tax you already paid on it when you file your tax return. If you’re taxed at a marginal rate of 30%, that means you’ll score a $300 refund, thanks to your $1000 contribution.
  • To really make the most of the RRSP, you should throw any RRSP-related tax refunds into your RRSP as well. That way, you’re *actually* contributing the pre-tax amount.

Having an RRSP

  • Once you have an RRSP, you can use it to hold almost any kind of “normal” investment, including cash, GICs, bonds, mutual funds or stocks. The official government line is to ask your financial institution what it offers within specific types of RRSPs, but unless you’re getting super fancy, you can probably keep your investments in one.
  • You can also use a self-directed RRSP, which lets you control exactly which investments go into your RRSP. If you want to build a portfolio full of stocks or ETFs that you manage yourself, this is probably what you’re looking for.
  • If your investments grow while they’re in your RRSP – which they probably will if they’re in there long enough – that growth is tax-free until you withdraw it. As long as it stays in the RRSP, it’s free to grow and compound without any pesky taxes.

Withdrawing from an RRSP

  • There are two tax-free ways you can withdraw money from an RRSP: the Home Buyer’s Plan and the Lifelong Learning Plan.
    • The Home Buyer’s Plan (HBP) in a nutshell: you can withdraw up to $25,000 from your RRSP to buy your first house, and the government won’t withhold any taxes on it. You’ll have 15 years to pay back the money into your RRSP in equal annual installments, but you won’t get a tax refund for those portions of your annual contribution (obviously). Get more details here if you’re really interested in the HBP.
    • The Lifelong Learning Plan (LLP) in a nutshell: you can withdraw money from your RRSP to fund a full-time, registered educational program for you or your spouse (no kids allowed). You have to repay 1/10th of the amount you withdrew every year until you’ve paid your RRSP back, and again – those repayments won’t score you a tax deduction. Grab all the deets here if you want to learn more about the LLP.
  • Pretty much every other time you withdraw from your RRSP, you’ll need to pay taxes on the money. That includes taking the money out in an emergency, and withdrawing it to fund your retirement.
  • Since taking money out of your RRSP is pretty much counted as “income,” it’ll also impact your government benefits programs, like EI. Make sure to take that into consideration before you touch your RRSP to buy a new car or something.

How You Can Use It

First, let’s get one thing out of the way: yes, the RRSP is way more complicated and regulated and tax-weird than the TFSA. Glad we’re on the same page there.

So how can you use it? Well, you can actually use it in a lot of the same ways as the TFSA when it gets down to the nitty-gritty details. You can use it to hold investments, and those investments are free to grow, tax-free, for the long term. That makes it a great option for retirement savings, since you’ll score decades of tax-free growth. The real difference is that with an RRSP, you’ll be on the hook for taxes when you withdraw your money.

You can also use an RRSP to save up specifically for a house downpayment if you’re a first-time home buyer (thanks, HBP) or to save up to go back to school (thanks, LLP).

Whatever goal you’re saving for, the tax returns you get from your contributions will be a welcome boost to your savings goal – and they really should go back into your account. In the long term, if you’re not doing that, you’ll end up with much less money in your RRSP, and you’ll still have to pay taxes on withdrawal. The whole point of that refund is to top up the contributions in your RRSP to make sure you’re contributing with “pre-tax” dollars, after all.

Is “RRSP Season” a real thing?

Nooooooo omg no it’s not please don’t believe the hype created by financial ads every year.

Here’s the deal: you generally have 60 days after the end of the calendar year to contribute more to your RRSP, and claim it on your previous year’s tax returns. Why? No freaking idea, but it’s a true fact.

That means that February is high season for marketing to people that omg, the RRSP deadline is approaching! There will be ads that try to convince you to throw a bunch of money towards your RRSP to increase your tax refund, and there will even be ads that try to get you to take out a loan to put money into your RRSP, so you can claim additional RRSP contributions on your tax return.

While those types of shenanigans have a place in a super-advanced tax plan, put together by a Real Life Tax Professional, if you are not paying a tax professional for this advice? Don’t do it. (OK, if you ARE that tax professional you can do it too, but otherwise, steer clear.)

Your regular, boring, every-paycheque contributions are fine and legitimate and “RRSP season” is not real. Don’t believe the hype.

How – and When – You Should Probably Use It

So since we’ve covered how not to use it – aka panic after seeing an ad about RRSP season and taking out a loan to put more money into your RRSP – how should you use? Well, there are a few questions you can ask to help you figure out whether an RRSP is right for you, and whether it makes sense to use one right now.

  • Will you need to withdraw this money, other than to buy a house or go back to school? If you’re even a little bit unsure about whether you might need this money to help top up a mat leave, or fund an emergency, or buy a new car, or adopt three more dogs, don’t put it in an RRSP. When you withdraw it, you’ll be on the hook for taxes, and those taxes will likely be withheld on withdrawal. So if you want to pull $5000 out of your account, you’ll likely only get between $3000 and $4000 in actual cash money. Sucky.
  • Is this money actually for retirement? If it is, the RRSP can be a really great option, because it almost forces you to lock in the money for the long term, thanks to those harsh withdrawal penalties. While there’s a lot to be said about the flexibility of the TFSA, the inflexibility of the RRSP can be just as good. (And if you’re saving for something that’s decades away, like retirement? You need to be investing that money. Here’s how to get started, even as a total beginner.)
  • Are you purposefully saving this money to buy a house or go back to school? If you are, that’s awesome, and this is a really tax-efficient way to do that. That said, if you’re saving it for retirement, but then see a house you just have to have? Maybe don’t raid what was intended as retirement savings to buy it ASAP. The HBP and the LLP are great, but not if you spend all the money you intended to save for retirement, with no other long-term savings in place.
  • Are you planning to put your tax return back into the RRSP when you get it? Listen, as hard as this is to do – and I say that as someone who currently does not do this – it really is the best practice. If you know that you’ll never be able to commit to sending your tax return right back into your RRSP, save for the long term in a TFSA. You’ll end up with more money overall that way. (If you’re like me and have a short-term goal for your refunds, and will begin re-contributing the money in a few years? Enh, that’s probably fine.)
  • Are you making more than you think you’ll spend in retirement? This is a pretty advanced planning question, so if you don’t know, that’s fine. Make a best guess though, based on how you picture your future self. Do you want to retire in ultra-luxury and spend $300K every year? Or do you picture a simple life of owning 17 dogs on a remote farm somewhere? (Hi. It me.) If your general view of retirement is a modest one, and you’re making more now than you think you’ll spend in retirement, the RRSP is probably a good bet.
  • Does your workplace offer RRSP matching? A commenter brought up this excellent point: if your workplace offers an RRSP, where they’ll match a certain amount of money you put into it? Your very first priority should be contributing enough to get that match. It’s free money, and you know how I feel about free money. (“Very positively” is how I feel about free money, to be perfectly clear.)

How One Millennial Uses It (Oh hey, it’s me.)

I’m no picture-perfect RRSP-haver, let me tell you that right now. Oh no friends. Anything but, if we’re being honest. Here’s the real deal.

  • For the first two years I was contributing to my RRSP, I had no idea about taxes, other than “If you contribute to an RRSP, you get a refund.” Literally that was it, so I contributed – even though I was making FAR less than I plan to spend in retirement, and that’s coming from someone who anticipates a very thrifty retirement. …Other than all of those dogs I want to have.
  • These days, I am making more than I plan on withdrawing in retirement, so I focus my retirement savings in my RRSP, not my TFSA. I’m also a big fan of the fact that there are such harsh tax implications if I wanted to raid my RRSP – it helps remind me that oh shit, no, that vacation is not worth ruining my retirement.
  • Contributing to my RRSP means I get a big chunk of money back when I file my taxes, which some experts will tell you is just giving the government an interest-free loan. Honest opinion: for the time being I’m not too worried about it, although I’ll probably adjust that in the future.
  • When I get that return, though, I send it straight to my house downpayment savings. It’s my compromise with myself: I’ve promised myself not to raid my retirement savings to buy a house, but I will allow myself to raid the tax refund I should have sent straight back to my RRSP to help give my house downpayment savings a boost.
  • I have my entire RRSP invested with Wealthsimple, so that the markets can help me achieve my goal of retiring ever. (If you use that link, you can score a $50 bonus for opening an account. Just saying. You’ll need to open a non-registered account so they can legally give you money, but once it’s there you can transfer it to your RRSP fo’ free.)

Someday I’ll be the picture of a perfect RRSP-haver (lol sure, that exists) but until then, I’m OK with being an imperfect human being and using it well enough for my current needs, plans and purposes.

Cheers to being human with your money, and doing it well enough! *raises eggnog glass, because screw it, it’s basically December already*

If you're a millennial who wants to learn more about how the RRSP can help you save for retirement, and how to use it, this is the post for you!