New Investors: How to Make the RRSP Work for You Now and Not Just in Retirement

The RRSP can work for you in retirement, but it can also bring huge benefits right now for investors looking to save money.

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The Registered Retirement Savings Plan (RRSP) is still the best way to save for retirement. There are many benefits, of course. First and foremost, you can invest and save for decades to help create income for retirement. Canadian investors also have a barrier put in place. If you take out that cash earlier, you’re going to get taxed. This is why you just need to let it stay put and grow.

The issue? Many Canadians might decide not to go for the RRSP because of this reason. I mean, I get it. Why invest in an RRSP when it doesn’t benefit you now, only later? After all, with the Tax-Free Savings Account (TFSA) you can take out at any time! And while it may have contribution limits, like the RRSP, those limits are quite high if you haven’t been investing for a while.

Benefits of the RRSP, now!

The RRSP, however, does have many benefits for younger and new Canadian investors. If saving for your retirement doesn’t get your engine going, then there are other points to consider. The best one? Taxes.

Yes, the best one is taxes. That’s not because you’re getting taxed; it’s because you’re taking taxes away every time you invest in your RRSP. The key? Look at your Notice of Assessment (NOA) for each and every year.

The NOA provides you with a contribution limit for each year. What’s more, it’s likely going to be far more than your TFSA contribution limit. And that’s true if you’re looking to invest a lot over a long period of time. But it’s not just the limit that provides you with more opportunities.

Bring down your taxes

The biggest benefit for today’s investors is that the RRSP brings your taxes down for every dollar you put into it. While this might not be a lot if you put in a couple hundred bucks, it can make a huge difference if you look into your province or territory’s tax brackets.

Tax brackets may be 5% from the federal or provincial government if you don’t make a lot. But if you do make a fair amount, these can be much higher. You could be paying around 40% of your income as taxes, not knowing there’s an easy way to bring them down: investing!

Let’s say you make $107,000 in Ontario. That would mean you fall within the 26% federal tax bracket, plus the 11.16% tax bracket in Ontario. That’s total taxes of 37.16%, around $24,000 of your income! Now, if you were to invest $9,000, that would bring you to a lower tax bracket in both cases.

So, you now get taxed 20.5% federally and 9.15% by Ontario. You now have taxes at just about $20,000. You’ve saved $4,000 in taxes — all from putting money towards your future!

Use it wisely

This likely will mean you’re going to receive a pretty fat tax refund from the government. But don’t spend it! Instead, use it towards your next year’s goal of around $9,000 again. That will mean you just have to save about $5,000 that year. Divided up, it means only putting $417 into your account month after month.

This is quite reasonable, and done with automated contributions, you don’t even have to think about it. What’s more, you can then make that RRSP cash turn into even more for your retirement by investing and reinvesting dividends again and again.

A great option would be to consider a company such as Canadian National Railway (TSX:CNR). This railway company is part of the duopoly of the railway sector in Canada. This makes it incredibly difficult for any new company to edge in. Moreover, it has a strong average return on invested capital of about 17% over the last decade. So, you can look forward to strong growth from this company as well as from shares and dividends.

So, make your investments work for you! Bring down your taxes, invest in your future, and feel good about every dollar you make.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool recommends Canadian National Railway. The Motley Fool has a disclosure policy.

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