Island Savings

Saving with a Retirement Savings Plan

Retirement Savings Plans (RSP)—save now or save later?

Retirement Savings Plans (RSPs) or Registered Retirement Savings Plans (RRSPs) seem like a simple retirement saving strategy. Put away as much money as you can in a tax-deferred account until you retire. Unfortunately, deciding if and when to contribute to your RSP isn’t always as simple as you might think.

Before you put money into your RSP, you need to ask yourself a few important questions. Is it best for me to contribute this year or should I wait? How much should I contribute? How will I know when I have enough money in an RSP?

As with other investment planning decisions, what’s best for you depends on your personal circumstances. You need to consider your current and future income, the amount of RSP savings you’ve accumulated already and your retirement plans.

For many Canadians, RSPs are the first thing that comes to mind when thinking about retirement planning. But contrary to popular belief, RSPs aren’t the best option for every situation.

If you’re early in your income earning years and not making a lot of money, you may want to wait to start RSP contributions. RSPs are best used as a tax sheltering and tax deferral tool. Making contributions during your low income years means a smaller tax break.

When you’re making less than $41,600 in taxable income, for example, your refund will only be about 24 per cent. During your low income years, you may want to consider using a Tax-Free Savings Account to save for retirement. Although you won’t get a tax break now, your investment will grow tax free and when you’re older and in a higher tax bracket, you won’t pay any tax on your gains.

Say a few years down the road your income increases and you’re earning $70,000—at that income level you’ll receive a refund of about 33 per cent. That’s a lot higher than the 24 per cent you would have received when you were earning less than $41,600. For people in higher income brackets, contributing to RSPs is a very effective tax deferral strategy.

The best course of action, regardless of your age, is to sit down with an Island Savings Insurance Services expert and create a comprehensive personal financial plan. It’s a service we offer at no charge, and it’s a great way to get an overall picture of your financial health so you can start working towards reaching your financial goals.

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