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Why you NEED to contribute to an RRSP This Year!

It's that time of the year again! There is snow on the ground, the 2014 Winter Olympics are under way in Sochi and it's almost tax time!

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This is the time of year that many people dread and rightfully so, it can be a time of regret, a time of worry or even a time of fear. This can be the year this all changes.

Often when people think of RRSP's they think that they are just something for long term financial gain and because of this many just figure that they will contribute "later". While this is possible, one of the biggest benefits of RRSP's is the compound interest that accumulates over the years. Another huge benefit is they are a massive tax deduction!

In all 3 examples below we'll assume we have $500 to invest at any point in time, we are going to watch a 20 year period, the interest rate is 4% per year.

Example 1

Previous Amount Deposit Interest Total
Year 1 $0.00 $500.00 $20.00 $520.00
Year 2 $520.00 $0.00 $20.80 $540.80
Year 3 $540.80 $0.00 $21.63 $562.43
Year 4 $562.43 $0.00 $22.50 $584.93
Year 5 $584.93 $0.00 $23.40 $608.33
Year 6 $608.33 $0.00 $24.33 $632.66
Year 7 $632.66 $0.00 $25.31 $657.97
Year 8 $657.97 $0.00 $26.32 $684.28
Year 9 $684.28 $0.00 $27.37 $711.66
Year 10 $711.66 $0.00 $28.47 $740.12
Year 11 $740.12 $0.00 $29.60 $769.73
Year 12 $769.73 $0.00 $30.79 $800.52
Year 13 $800.52 $0.00 $32.02 $832.54
Year 14 $832.54 $0.00 $33.30 $865.84
Year 15 $865.84 $0.00 $34.63 $900.47
Year 16 $900.47 $0.00 $36.02 $936.49
Year 17 $936.49 $0.00 $37.46 $973.95
Year 18 $973.95 $0.00 $38.96 $1,012.91
Year 19 $1,012.91 $0.00 $40.52 $1,053.42
Year 20 $1,053.42 $0.00 $42.14 $1,095.56

 

Example 2

Previous Amount Deposit Interest Total
Year 1 $0.00 $25.00 $1.00 $26.00
Year 2 $26.00 $25.00 $2.04 $53.04
Year 3 $53.04 $25.00 $3.12 $81.16
Year 4 $81.16 $25.00 $4.25 $110.41
Year 5 $110.41 $25.00 $5.42 $140.82
Year 6 $140.82 $25.00 $6.63 $172.46
Year 7 $172.46 $25.00 $7.90 $205.36
Year 8 $205.36 $25.00 $9.21 $239.57
Year 9 $239.57 $25.00 $10.58 $275.15
Year 10 $275.15 $25.00 $12.01 $312.16
Year 11 $312.16 $25.00 $13.49 $350.65
Year 12 $350.65 $25.00 $15.03 $390.67
Year 13 $390.67 $25.00 $16.63 $432.30
Year 14 $432.30 $25.00 $18.29 $475.59
Year 15 $475.59 $25.00 $20.02 $520.61
Year 16 $520.61 $25.00 $21.82 $567.44
Year 17 $567.44 $25.00 $23.70 $616.14
Year 18 $616.14 $25.00 $25.65 $666.78
Year 19 $666.78 $25.00 $27.67 $719.45
Year 20 $719.45 $25.00 $29.78 $774.23

 

Example 3

Previous Amount Deposit Interest Total
Year 1 $0.00 $0.00 $0.00 $0.00
Year 2 $0.00 $0.00 $0.00 $0.00
Year 3 $0.00 $0.00 $0.00 $0.00
Year 4 $0.00 $0.00 $0.00 $0.00
Year 5 $0.00 $0.00 $0.00 $0.00
Year 6 $0.00 $0.00 $0.00 $0.00
Year 7 $0.00 $0.00 $0.00 $0.00
Year 8 $0.00 $0.00 $0.00 $0.00
Year 9 $0.00 $0.00 $0.00 $0.00
Year 10 $0.00 $0.00 $0.00 $0.00
Year 11 $0.00 $500.00 $20.00 $520.00
Year 12 $520.00 $0.00 $20.80 $540.80
Year 13 $540.80 $0.00 $21.63 $562.43
Year 14 $562.43 $0.00 $22.50 $584.93
Year 15 $584.93 $0.00 $23.40 $608.33
Year 16 $608.33 $0.00 $24.33 $632.66
Year 17 $632.66 $0.00 $25.31 $657.97
Year 18 $657.97 $0.00 $26.32 $684.28
Year 19 $684.28 $0.00 $27.37 $711.66
Year 20 $711.66 $0.00 $28.47 $740.12

 

Surprised by the results?

In example 1 - we invested $500 the first year and just watched it grow over time. After 20 years of compound interest our total amount is $1,095.56

In example 2 - We invested $25 each year for 20 years. After the 20 years of deposits and compound interest, our total amount is $774.23

In example 3 - We invested $500 in year 11. At the 20 year mark, with compound interest, our total amount is $740.12

 

It pays to invest and contribute earlier than later. In example 1 we more than doubled our money, this is due to the compound interest. Our initial amount collects interest, and increases in value, then after this - our initial amount, plus the interest that we already collected previously collects interest. So our investment not only grows, it grows exponentially.

Now that we've discussed the long term benefits of RRSP contributions, we must also keep in mind the short term benefits. Other then just feeling good that we have money set aside for our future, we can also receive a HUGE tax break by contributing.

Depending on which province you live in, and how much you earn, on every $100 you contribute, you will receive $25-$50 back on your tax return. This is HUGE. You are investing in your future and the government is rewarding you. It's not everyday you have a win, win situation.

Let's think about this one:

  • You are contributing to your retirement
  • You will be collecting compound interest on this investment
  • The government will give you money now for this investment

How can you go wrong? The answer is - you can't!

The deadline for RRSP contributions for this years tax return is march 3, 2014. To read more about RRSP's, visit the government of Canada's website - http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/cntrbtng/menu-eng.html

 

 

Comments (1)

 

  1. […] to hate it! TAX TIME! Hopefully by now to help make the tax-man more lenient you have made some RRSP contributions, if not then it’s still not too late, there are a few weeks left for your to contribute and […]

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