Get started on your retirement savings plan

How to contribute to and grow your RRSP

While retirement may seem years and years away, the earlier you set up a savings plan, the better off you’ll be. The ideal way to start is with a Registered Retirement Savings Plan (RRSP) since any money you contribute becomes a tax deduction.

Here are a few tips to ensure a good beginning and a strong finish. The sooner you start, the more you'll have to enjoy when you're ready. Don't procrastinate – waiting will cost you.

The first step in making your RRSP savings grow is to start contributing early. This gives your investment a longer time horizon to earn you tax-sheltered income.

Automate your savings

One of the easiest saving strategies is to have monthly or bi-weekly contributions automatically transferred from your bank account to your RRSP. You'll be surprised at how your money grows over time. You can start small with an RRSP Savings Account and make contributions until you reach the minimum balance to invest in something that will earn you a higher rate of return, like a mutual fund* or term deposit.

Max out your contributions early

Contribute your maximum amount as early in the year as possible; you'll earn additional interest on your investments throughout the year. An early start is always a major advantage in any investment plan, allowing you to reap the benefits of compounding interest. When your funds are tax-sheltered (such as in an RRSP), your portfolio grows faster.

If you can, contribute the maximum allowable to your RRSP to take advantage of the tax benefits and build your savings. If you don't have cash accessible, consider taking out an RRSP Loan, and use your tax refund to reduce your borrowed RRSP debt.

Understand the power of compounding

The power of interest compounding means small savings can produce big rewards. If you contribute $200 each month to your RRSP beginning at age 20, by the time you're 65 you'll have nearly $300,000, based on an interest rate of 4%. However, start just 15 years later with the same contributions, and you'll end up with a little less than half that amount, or about $140,000.

The Rule of 72 for fixed-rate investments shows you how long it will take to double your investment. Simply divide 72 by the annual rate of return and the result will be the number of years it takes for your money to double (e.g., 72 divided by 6% = 12 years).

Your future can fund your present

When you purchase your first home, you can use up to $60,000 of your RRSP savings ($120,000 for a couple) through the Home Buyers' Plan. And if you decide that you wish to continue your own education or training, you can also use up to $10,000 in a calendar year of your RRSP through the Lifelong Learning Plan (up to a maximum of $20,000).

The key benefit to withdrawing funds from your RRSP under either of these plans is that your money remains tax sheltered, provided you "pay yourself back" within the defined timelines.

The right advice makes all the difference

When your RRSP savings start to build, be sure to talk to a financial advisor to ensure they're invested for maximum growth. It's also a great time to start developing an overall financial plan to address all your financial objectives and determine the best way to achieve them.