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What young investors need to know about RRSPs



As the deadline for contributions to registered retirement savings plans (RRSPs) approaches, young investors are urged to consider key factors in deciding where to allocate their money. The RRSP deadline for the 2023 taxable income deduction is Feb. 29, prompting questions from investors about the optimal contribution and potential prioritization of other investment accounts.


Scheherazade Hasan, senior advisor at Wealthsimple, emphasizes the relevance of RRSPs for young savers, even those earning less than $60,000 annually. She suggests a rule of thumb for clients making over $50,000 to $55,000, aiming to save for retirement, a first home, or education, stating that investing in an RRSP is a wise choice.


Julie Seberras, head of wealth planning and practice management with Manulife Wealth, underscores the importance of starting investment in one's 20s. She highlights the advantage of time for younger investors to weather market fluctuations.


For those with income under $55,000 seeking flexibility, contributing to a tax-free savings account (TFSA) is an alternative, according to Hasan. A TFSA allows various investments with no tax on earned income or withdrawals.


Differentiating between RRSPs and TFSAs, Hasan notes that RRSPs defer taxes on investment gains, with income being tax-exempt in the account but taxed upon withdrawal. The choice between the two depends on individual goals, considering potential income changes and eligibility as a first-time homebuyer.


Hasan introduces the first home savings account (FHSA) as a hybrid option that combines RRSP and TFSA benefits. It allows tax-deductible contributions and non-taxable withdrawals for first-time homebuyers. She recommends opening an FHSA for those eligible.


If the FHSA is maxed out, Hasan advises prioritizing between a TFSA and RRSP based on current and future income projections. Seberras leans towards prioritizing TFSAs for younger investors due to their flexibility and accumulation starting at age 18, while RRSPs are suggested for long-term retirement savings.


Considering individual circumstances, Seberras notes the importance of managing debt for some investors. While addressing debt may be a priority, it's essential to evaluate the potential returns from investing funds instead of paying off debt.


The spousal RRSP, often overlooked by young investors, offers substantial benefits for couples with disparate incomes. Hasan explains how the higher-earning partner can contribute to their spouse's retirement, lowering the overall tax burden in retirement.


Another option is the group RRSP, a retirement plan offered by some employers, with contributions directly from an employee's paycheck. Hasan encourages employees to take advantage of employer matching programs, contributing enough to receive the full match, as it forms part of their compensation.


In conclusion, young investors are encouraged to carefully assess their financial goals, income levels, and priorities when deciding on RRSPs, TFSAs, or other specialized accounts, ensuring a well-rounded approach to wealth accumulation and financial planning.


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