Many benefits to having RRSPs

Plans offer contribution flexibility, investments at various risk levels

Every February, we get the email or phone call reminder from our bank or investment advisers letting us know there is a short time left to contribute to registered retirement savings plans (RRSPs).

And the same question pops up every year: Where is the best place to put my money?

An RRSP is a Canadian investment and savings plan that dates back to 1957. RRSP funds can be invested in mutual funds, bonds, guaranteed investment certificates (GICs), sometimes equities or stocks, and foreign markets, depending on the financial institution.

The overall sentiment seems to be: It is a good thing to contribute to an RRSP regularly. And there are a number of reasons why.

First, and perhaps most importantly, RRSPs are one of the few ways to get a tax break. Quite simply, a bigger contribution (to a maximum of $26,010 for the 2016 tax season, or 18 per cent of your gross income) equals a bigger tax refund. Your maximum RRSP contribution amount is based on the income you earned the year before, and can be found on your Notice of Assessment (NOA) for your 2016 year of employment received from the Canada Revenue Agency.

When it comes to a contribution schedule, an RRSP is flexible. You can contribute a lump sum before the March 1, 2017, cut-off, or opt to pay weekly, bi-weekly or monthly, or combine those with a lump sum. Investors can also defer contributions to the following year. RRSPs can be started any time after the age of 18, and are collapsed at age 71. They also enjoy creditor protection.

Investors can generally expect to see anywhere from a four- to nine-per-cent return, depending on their risk profile. An approximate value of an RRSP can be determined using any online RRSP calculator. For example, a more aggressive 25-year-old investor putting away $400 per month making eight- to nine-per-cent returns and wanting to retire at 65, ends up with about $1.3 million in the bank, depending on market volatility. The same investment with four- to five-per-cent returns yields around $466,000 at age 65.

Unfortunately, because it is a retirement plan, all tax advantages are eliminated if you decide you need the money you invested in an RRSP.

When it comes time to take your money out at retirement age, every dollar gained in investment is taxed, and depending on what you budgeted for retirement, you will be taxed in the bracket according to your income.

Want to start an RRSP? An appointment with an investment adviser at your financial institution or an independent investment adviser is a great place to start. You can also apply online or go through telephone banking to set up an RRSP.

If you want to play around with numbers and budgets to see how much money you need to contribute today to enjoy life in retirement, try using the RSP-Matic Calculator available on most bank and financial institution websites.

The cut-off to contribute to RRSPs this year is March 1, 2017.