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Special to the Echo

Retirement is a distant reality for many Canadians, however it’s never too soon to think about it, especially if you have several different projects in mind. In the absence of a pension fund, a Registered Retirement Savings Plan (RRSP) is still the best way of building savings in order to live comfortably during this period of your life. Unfortunately, only 30 per cent of Canadians have RRSPs despite the many advantages this financial tool offers.

An RRSP is an excellent way of reducing income tax. Some say that this is only a temporary advantage as these savings will be taxed when withdrawn from the RRSP during retirement. This is true, of course, but these funds will be added to your other income, which is normally much lower during this period of your life. A lower income results in a lower rate of taxation and this is where you can benefit from income tax savings.

An RRSP can also be used to purchase a first home thanks to the Home Buyers’ Plan (HBP).

For someone who does not pay income tax, an RRSP is obviously not as interesting. There is a limit to what can be invested each year in this type of program, especially if you also have a company pension plan. Be aware that if this limit is exceeded, there may be a government penalty to pay.

The decision to contribute to an RRSP is an important one that requires constant long term effort. It’s essential, therefore, to take your income into consideration. Regardless of the amount you want to invest, every dollar counts. For example, an individual who contributes $100 every month, starting at the age of 25, over a period of 40 years, will have accumulated $125,000 with an average return of 4%. Over a 35 year period this amount would be approximately $97,000.