When it comes to getting the most out of your money, there are few things as helpful as the RRSP. You can reduce the amount of taxes you pay right now, since RRSP contributions grow tax-deferred, and you can use the power of compound interest to grow your nest egg. RRSP contributions can be one way to get the best use of your money, and maximize your ability to grow your wealth.
One of the best ways to do it is to make it automatic. You can arrange with your employer to have money from your paycheque automatically placed into your RRSP account. You can also set up an automatic transfer that moves money from your checking account into your RRSP account on the same day of each month.
Automatic savings for your RRSP can ensure that you are setting money aside for the future, and that the money is doing the most good for you, since you aren’t paying taxes on it right. Tax-deferred earnings can keep working for you without the drain that can come from paying taxes right now. The more money you can put in now, the better the chance that it will grow significantly in the future.
Should You Borrow to Pay into Your RRSP?
Some people are interested in contributing to a RRSP, but don’t have the money to make the contribution. In some cases, borrowing might help. However, you do need to be careful if you decide to borrow money in order to fund a RRSP account. Your tax benefit, combined with a good return, can outweigh the interest you pay on a RRSP loan.
On the other hand, though, your RRSP account is an investment account, and there is the risk of loss. If you aren’t careful, you could lose money. Then, the interest you pay to borrow far outstrips the benefit of saving up in the RRSP account. If you have credit card debt, it’s better to pay it down, though, than to try to borrow even more to fund your RRSP. Credit card interest is costly, and you are better off paying off credit card debt as quickly as you can. The interest you pay is likely to overwhelm any returns on an investment — especially in the short term.
Few Canadians have enough money for retirement without the help of investing. The RRSP account can be a great way to save for the future, while reaping a tax benefit.