Should our 18-year-old be putting his savings into an RRSP?
Q:
My son is 18 years old, going away to university next year and has saved some money from his part-time job at a local Hamilton golf course. His Notice of Assessment from the government says he can put $3,210 into an RRSP. His dad and I sure wish we had started saving when we were his age. So, should our son be putting his money into an RRSP?
A: Let me first congratulate your son on saving money from his job. Of course, saving money for your future is extremely useful and, in fact, the habit of saving is the most advantageous factor. A Registered Retirement Savings Plan (RRSP) is just one of the many ways to save money and there are many advantages to it, but he should probably not be contributing to an RRSP in his situation.
An RRSP is most useful when your taxable income is over approximately $46,000 and I’m going to guess his part-time job doesn’t create that much income. The higher your income, the more beneficial an RRSP becomes because it can reduce your taxable income and, therefore, the amount of tax you have to pay.
Think of an RRSP like a box that you can put investments into for your future. These monies are most often used to fund your lifestyle when you are no longer working. So, an RRSP is best used for longer-term planning, saving and investing money that you believe you won’t touch until way down the road.
I suspect your son hasn’t even begun to think of retiring since he hasn’t started working full time yet. More importantly, he’ll probably have some short-term goals that require more immediate savings, such as his university costs next year, or saving for a vehicle, or maybe a business he would like to start after he’s done school. Savings for these goals should not go into an RRSP, partly because any withdrawals from an RRSP will be taxed at the time the money is taken out. A more suitable investment box would be a TFSA (Tax-Free Savings Account). As the name suggests, as he earns income on investments held in this type of box, he won’t have to pay any tax on them. And when he withdraws these monies for some of those shorter-term goals, then no tax will be owing either.
But don’t worry about your son losing the RRSP room that he currently has. Each dollar he earns now gives him a credit of 18 cents of RRSP room in the future. Let’s say his part-time job provided him with $10,000 of income this year. Then, after he files his tax return for 2018, he will see on his Notice of Assessment that he has $1,800 of new RRSP contribution room. And this will accumulate year to year. By the time he’s done school and starting his career — and earning more than that magical $46,000 — he could have thousands of dollars of RRSP room available. And that’s when he ought to be contributing to an RRSP for his retirement.
Another advantage when he starts contributing is that he’ll begin to reap the tax advantages that RRSPs provide. Every dollar that he puts into his RRSP box for his future will reduce the amount of income tax he has to pay today. And as his investments earn income in his RRSP, he won’t have to pay any tax on them today either. (The little trick is that he will have to pay tax on withdrawals from his RRSP, but that will be years and years from now, and possibly at a lower tax rate than in his working years.)
From your own experience, I know you and your husband want to impress upon your son the importance of saving — and I think that’s a brilliant idea. So, let’s encourage your young man to be saving some of his earnings in a TFSA for whatever he sees on the near horizon. And once his career is underway and he’s earning more than $46,000, to redirect some of those savings to an RRSP to build wealth that can fund a comfortable retirement. And he’ll have Mom and Dad to thank.
Thie Convery, R.F.P., CFP, CIM, FMA, FCSI, is a Dundas wealth adviser. Her column appears bi-weekly in The Hamilton Spectator. You can reach her at TheSpecMoney@gmail.com or by visiting www.ConveryWealth.com.