With tax time on the horizon we’re all about to be inundated with Registered Retirement Savings Plan (RRSP) ads. The deadline for making RRSP contributions to offset your 2012 taxes is Friday, March 1. But are RRSPs your best option for retirement savings? The answer depends on several variables, including your age, income, marital and family situation, tolerance for risk, and your lifestyle. Here, we cover the basics of common investment options and when you’re most likely to choose each.
Registered Retirement Savings Plans (RRSP)
According to Scotiabank’s 2013 Investment Poll, more than half of all Canadians (51 per cent to be precise) start investing in RRSPs prior to their 30th birthday. There are a number of reasons why young people would use this option to invest for their future, but the most significant is the tax savings that RRSPs offer. For every dollar you contribute to RRSPs (up to your personal RRSP deduction limit – stay tuned for more on that) you’re effectively able to shave a dollar off your income for the year. If you’re a salaried employee with taxes automatically deducted, the net result will be a refund after you file. When you’re just starting out, with a relatively low salary and a big mortgage or rent eating up a good chunk of your disposable income, every extra dollar makes a difference.
Another reason younger people jump on the RRSP bandwagon is that the program is generally a long-term proposition. If you’re young, you have the luxury of riding some up and down waves over the coming decades.
Registered Education Savings Plans (RESP)
Once you have children, you’ll want to look into Registered Education Savings Plans (RESP). While these aren’t really for retirement planning, they do operate similarly to RRSPs and, if you do plan on contributing to your children’s post-secondary education, they’re a great way to do so without having to deplete your savings – or go into debt. While there’s no immediate tax savings for investing in RESPs, any interest the investment earns accrues tax-free. And each child with an RESP account is also eligible for up to $500 a year in government grants (higher for low-income families and/or residents of Alberta).
CSBs – Invest With Security
If you’re closer to retirement, you’re likely looking to make investments with stability in mind – and you’d be hard-pressed to find a more secure investment that Canada Savings Bonds (CSBs). When you buy a CSB, which are available in amounts ranging from $100 to $10,000 bonds, you’re essentially loaning the government money to cover day-to-day costs in return for a set amount of interest, increasing at the end of each of three years. The bonds are also fully guaranteed by the government. In other words, once you buy a CSB it will always be worth what you paid for it, plus whatever interest it has accrued. As a result of this stability, the federal government says nearly three-million Canadians own CSBs.
Guaranteed investments are nice, but there are two big drawbacks to CSBs; currently, as with all other interest rates, the return on CSBs is extremely low: one per cent for 2013, 1.2 in 2014, and 1.4 in 2015, and that interest is only paid after each full year you own them. Cash a bond 11 months after buying it and you’ll only get the face value.
Go For the Guarantee
Another secure option is Guaranteed Investment Certificates (GICs). The easiest analogy to make is that GICs are a private bank’s equivalent of government bonds. GICs are a little more flexible, with terms ranging from a matter of months up to 10 years. Usually, the shorter the term the lower the interest rate. But even the best GICs on the market max out at less than three per cent. Not the kind of return you’ll be able to retire wealthy on – but given the recent economic climate, it sure beats losing money.