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Why You Need To Take Advantage Of Early RRSP Contributions


Why You Need To Take Advantage Of Early RRSP Contributions

RRSPs are easy to understand: they put time on your side. Your savings grow tax-free, which improves your return. In addition, your tax rate is generally lower at retirement than during your working years.

The longer your money stays in this tax shelter, the greater your retirement capital. That's why it's important to start contributing as early as possible.

If you're a recent graduate venturing into the job market or if you have young kids, this isn't always easy. You probably have a tight budget, and retirement may seem far off. However, the example below shows just how advantageous early contributions  can be.

Annual contribution Total investment Value at age 55
$1,500/year from age 25 to 55 $45,000 $118,587
$3,000/year from age 40 to 55 $45,000 $69,828

The earlier in the year that you contribute, the more you'll earn. Always remember: time is your best ally!

With that being said lets say you are a 25 year old who is fresh into the work force you shouldn't be routing a big chunk of your cash flow into your RRSPs if you have thousands of dollars in student loans, or even worse thousands of dollars in high interest credit card debt. This make no sense for you to put majority of your money into a RRSPs where you are only earning approximately  5% interest and your credit and loan debt you are paying more than 19% interest.

Of course if your situations allows it you need to start investing as soon as possible. The earlier you begin, the longer you have to benefit from the compounding growth of your investments.

But first you need to try and get rid of the debt. Once high interest debt is under control, then you can divert more money into your RRSPs.

Just remember every dollar you put towards your debt is every bit as effective as a dollar saved for retirement.

So when you are young and you have debt and want to start putting money away for your retirement. It is recommended that you put 60% of your extra cash, 20% into savings for your home, wedding, new car, and the other 20% into your RRSP So by putting that extra 60% on your debt you will help pay off your debt faster and by putting 20% into savings will help you from accumulating more debt, and by starting to put 20% into RRSP is better than nothing and will help you with the compounding interest.

Example of this lets say you have a extra $200 after paying your bills, Take $120 to put onto your debt, $40 into your savings (preferably a Tax Free Savings Account). Take the other $40 and put that onto your RRSP monthly.

If you start at age 25 by just putting away $40.00 every month that is $480 a month you will have $60,883 by the time you are age 65.  Which is obviously isn't enough for retirement but you will be on track for getting to your goal.

Also Remember whenever you make payments into your RRSPs you will get a tax break come tax time and you will get more money back when you file your taxes. Take that money and reinvest it into your RRSPs. Remember when you do retire you will need to pay taxes on the money you take out from your RRSPs.

Make sure you regularly revisit your RRSP holdings and monitor their performance, you’ll know whether they’re reaching the goals you have in mind and if you need to tweak the balance to make it work for you.

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