Believe it or not, there are still advantages of contributing to your RRSP even if you have a low income. I know that, most of the time, when you income is low, there is no place for savings. However, some people are very disciplined and frugal (not like me!) and they still manage to put a few bucks aside. Then, they decide to put into their bank account since they would not get a high tax return. So here are some reasons why you should contribute as early as possible.
You can defer your tax return
Many people think that when they receive their RRSP slip, they have to put the full amount in their income report. In fact, you have to choice of contributing right away but using your tax deduction for another year. Therefore, your investments will still qualify as RRSP’s but you will not get a tax return on the very same year. You are allowed to defer your tax reduction later on in order to benefit from a bigger tax return. This method is especially efficient for student who has a small income but will surely hit bigger tax brackets when they start working full time.
Your investment still grow tax free
An RRSP account is a tax sheltered account where you are allowed to deposit money. Even thought you did not ask for your tax return, your investment will still grow in a tax free environment (I wish I could live in such environment!) So interest income, dividends or even capital gains stay fully invested in your RRSP account and you don’t have to pay taxes on it until the day you start withdrawing. Isn’t life beautiful?
The power of compound interest
I wrote a post a while ago about what Einstein qualified as “the most powerful discovery”. Did you know that if you invest $1000 at the beginning of the years for 30 years at 7%, you will get $101,073 in your RRSP account? Then, if you wait 10 years before contributing, you would have to put $2,465 (so 2,5 times the original amount) over 20 years to get to the same result. This would result into a total contribution of 30K in the first scenario and 49K in the second one for someone who waited 10 years before starting to contribute.
The bottom line is that you must contribute as fast as possible in order to have a nice nest egg when you retire. Don’t wait until you’re in the highest tax bracket. Invest now, benefit from the tax sheltered environment and the power of compound interest; you will have plenty of time to claim your tax return later on!
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