What are RRSPs and How do They Work?

RRSPs are becoming more and more popular these days, and rightfully so. As fewer companies offer pensions for employees to rely on, an increasing number of Canadians are using RRSPs to help fund their retirement. Moreover, many employers now offer RRSP contribution plans where they will match your RRSP contributions (usually around 3-6% of your paycheque). Are you not sure what Registered Retirement Savings Plans (RRSP) are?

Here are a few pointers for you to help clear the air:

I won't get too in-depth here considering there are so many little quirks, but here are the basics. Before I continue, first things first: If you ever hear people referring to RSPs instead of RRSPs, stop confusing yourself - it's the same thing.

1. Overview: RRSPs are a way to shelter your investments for the longterm to help you save for retirement. Just like a TFSA, you do not pay tax on any money earned from your RRSP investment.

2. Type: Just like TFSAs, you can have an RRSP as a typical savings account, GICs, Mutual Funds, Stocks, etc. Think of RRSPs as an umbrella, and you're simply sheltering your money underneath it from tax. What type of investment you shelter it in is up to you.

3. Tax Benefits: As stated earlier, any money earned from your RRSP investment isn't claimed as income until you withdrawal the funds from your RRSP. This is a big deal, especially if you're building up your RRSP over a long period of time.

4. Tax Benefits Continued: Any money you contribute to your RRSP comes off your income earned for that tax year. In other words, you are lowering your taxable income. This is huge.

For example: If you earned $20,000 in 2012, but contributed $2000 to your RRSP, it is as if you only earned $18,000.

As a result, you save a lot of money when it comes to filing your taxes. Over the longterm, the money you save in your RRSP from not paying taxes will reap rewards in the future.

5. Limits: You can contribute up to 18% of your overall income to your RRSP. Make sure you watch what your employer is matching to ensure you don't go over the limit. However, if you earn more than $125,000 per year, you are capped at contributing $22,970 for the 2012 tax year.

6. Withdrawal of your RRSP: You can withdrawal your RRSPs at any time, however when you do, the money you take out is actually considered income for that year. So be careful, and try to avoid doing this until retirement (or buying your first home - see number 8).

7. Timeframe: You can contribute to your RRSP at any time, however the timeframe is extended for an additional two months each calendar year. In other words, you can contribute to your RRSP for the 2012 tax year in January and February of 2013. This may be beneficial to you if you know you're going to have to pay significant taxes for the 2012 tax year.

8. Buying a home: If you are buying your first home, there is an exemption where you can actually withdrawal your RRSPs tax free. This is called the Home Buyers' Plan (HBP). You then have to recontribute the funds you withdrew over a 15 year time period. 

Hope that helps! If this didn't answer your questions, just leave a comment or head on over to the official Government RRSP page.

What is a TFSA and How Does it Work?

Many Canadians are confused as to what a Tax Free Savings Account (TFSA) is, and how it works exactly.

Here, I'll give you the basic points to help clear the air:

1. Why: The main purpose of a TFSA allows you to save money and not have to claim any interest earned as income. 

For example: If you earn $200 on a normal investment, you would normally have to claim that $200 as income earned on your taxes. Therefore, after you file your taxes, you would be left with far less than $200. However, if your investment is under the TFSA umbrella, you do not have to claim any of your interest earned as income. Therefore, you keep the whole $200. 

This doesn't sound like a big difference, but if you make greater returns using the stock market for example, then it becomes a big deal. Moreover, if you're in a high income tax bracket, you can lose close to half of your interest earned if your investment wasn't in a TFSA.

2. Type: A TFSA can be applied to almost any personal investment. Whether it's a normal savings account, GIC, or invested in the stock market, you can shelter the investment in a TFSA. Just make sure you don't go over your limit between your different TFSAs. Keep in mind a TFSA can't be joint with anyone else. It is a registered product with the Government.

3. Limits: As of 2013, the maximum you can contribute to your TFSA is $25,500. The government will announce how much will be added next year to the total, however it generally increases by about $5000.

4. Contributing: Be sure to understand how contributions work. If you over contribute, you may receive a penalty from the Government. If you open a TFSA this year and have never contributed before, you can contribute the full $25,500 if you have it. You are then allowed to withdrawal some of the funds if you need to during that year, however you can't re-deposit funds until the following year. 

For example: At the end of 2012, you have $20,000 + interest in your TFSA. You then contribute $5,500 to your TFSA in 2013 to top up to the limit of $25,500. Then you withdrawal $8000 due to a family emergency.  You are not allowed to re-deposit that $8000 in 2013. You have to wait until 2014 to re-deposit the $8000. Additionally, you are also allowed to contribute whatever amount the Government raises the limit to.

5. Demographics: You may not be entitled to the same limit as the majority of others depending on your age, and how long you have been a Canadian citizen. As of 2013, if you have been a Canadian citizen for less than 5 years, or are under the age of 23, please check here to view what your contribution limit would be: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/cntrbtn-eng.html

If you have any other questions that I didn't answer here, just leave a comment or go to the Official Government TFSA Page. Hope that helps!

I want to start investing some money...where do I start?

So you've just graduated, and you're going to start rolling in the dough. Or you've simply decided it's time to start saving and investing your money better for the long term. Well here are the basics:

Disclaimer: I'm not going to go into the specifics of each investment option here; these are just going to be general rules to get you going and to get you into the right mindset. In the future, I'll get into what each type of account means and how they work. Also, if you don't know what RRSPs, TFSAs and GICs are...don't worry, I'll get into that stuff later. 

Here are some basics to get your saving started properly:

1. Save 10% of your paycheque and put it in RRSPs. This option is especially great if your employer will match up to a certain percentage of your contributions (usually 3 - 6%). Keep in mind, you can always withdrawal money from your RRSPs to buy your first home. I know you're still young to put away money for retirement, but trust me, the younger you save, the more your money will exponentially grow. Plus, if you don't end up needing to go into your RRSPs for your first house purchase, you've gotten a huge head start towards retiring early.

2. Put any additional savings into a Tax Free Savings Account (TFSA). Banks generally offer higher interest rates on TFSA accounts rather than normal savings accounts. Plus, you can have access to typical TFSA savings accounts at any time as long as you don't lock the funds in. As of 2013, you can deposit up to $25,500 into your TFSA, assuming you have been a Canadian citizen for the past five years.

3. If there is any chance you may want to buy a house in the next 5 years, Do not lock in your money! I can't stress this enough. In this day and age, banks don't offer GICs that offer significantly higher interest rates than typical savings accounts (especially if it's a TFSA). I've seen it time and time again where young people lock in some of the savings they have, and then have to withdrawal it with a penalty because they decided the wanted to purchase a house. Unless you are an incredibly conservative investor and have no desire to purchase a home within 5 years, stay away from GICs, they aren't worth it.

4. Finally,  stick with your plan! You may not be able to get the faster car or the nicer rental apartment, but you'll be happy you stuck with it in the end. A penny saved is truly a penny earned.

So who am I?

I don't really like explaining myself in just a few words, but here we go.

My name is Colin Peters and I'm 23 years old. I have worked at Ontario's largest Credit Union since the age of 18. I also completed my undergrad in 2012, and am in the process of completing a Post-Grad in Public Relations.

Since starting my career over 5 years ago, I have had the opportunity to work in a finance environment working with financial advisors (usually more than twice my age ;)). I've also done a lot of self-investing including investing in mutual funds, bonds, and stocks. Of course, since I work at a Credit Union, I have thorough knowledge of all typical financial institution products like demands accounts, GICs, and how RRSPs and TFSAs associate with these products.

Through my experience, I have learned A LOT. I thought it would be pretty simple, but there are a lot of random quirks that would be good to know that I have had to learn on the way (and sometimes the hard way). This blog is a place where I will discuss the basics, and not so basic tips for investing. Since I'm still in my early 20s, many of my posts will relate more to "new investors" that are just starting out.

I hope you enjoy! I will answer any questions you have for me!