3 Lesser-Known Reasons to Invest in an RRSP
Senior housing
The Registered Retirement Savings Plan (RRSP) is a strong investment strategy Canadians can use for their retirement goals. But if youâre a younger investor, it can be difficult to make it a priority. After all, retirement is so far away, and you donât even have a house yet!
But that being said, there are certainly some strong reasons to invest in an RRSP right now. So letâs get into them, and how you can make an investment that would work for you right away.
Spousal benefits
A strong benefit from the RRSP is that you can use it in tandem with your spouse. First off, you could consider a spousal RRSP. This method allows higher-earning spouses to contribute to an RRSP in the name of their lower-earning spouse. Upon retirement, withdrawals are taxed in the hands of the lower-income spouse, potentially resulting in overall tax savings.
Furthermore, during retirement, RRSP withdrawals can be strategically planned to minimize taxes by spreading income over multiple years or taking advantage of lower tax brackets, especially if one spouse has a significantly lower income than the other.
All together, by working with your spouse you can lower your taxes each year, saving you money! And that will help you in retirement as well.
Higher limits
While the Tax-Free Savings Account (TFSA) is, of course, tax-free, the TFSA has limits. Although there are still limits with the RRSP, there are far higher limits. This higher contribution limit allows investors to shelter a larger portion of their income from taxes, thereby maximizing their retirement savings potential.Â
The maximum RRSP contribution limit for a tax year is subject to change and is influenced by factors such as changes in the annual inflation rate. Furthermore, RRSP contribution room accumulates over time, and any unused contribution room can be carried forward indefinitely.
This means that if you don’t contribute the maximum allowable amount to your RRSP in a given tax year, the unused portion can be carried forward to future years. This feature allows individuals to catch up on their retirement savings in years when they have more financial capacity to do so.
Wide-ranging investment options
Not only are there tax benefits and contribution room that carries forward, but there are also a wide range of investment options. RRSPs offer a broad array of investment options, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), guaranteed investment certificates (GIC), and more. This flexibility allows investors to tailor their RRSP portfolio to their risk tolerance, investment goals, and time horizon.
In fact, I would recommend several different investment options to create a diversified retirement portfolio. You could set up a GIC that comes to term in the next 20 years for instance! On top of that, an ETF can provide you with long-term growth as well.
But there are other options in case you decide you want to retire early, or need to take out RRSP contributions early. That would include things like parental leave, or buying a home. In this case, coming up with some higher growth options that include dividends can be a big benefit.
Two options
Options I like right now are Canadian National Railway (TSX:CNR) and the BMO Canadian Dividend ETF (TSX:ZDV). CN Rail is one of Canada’s Class I railways, providing transportation services for various commodities across North America. CNR has a solid track record of dividend growth and benefits from the economic moat created by its extensive rail network. It offers a 1.95% dividend yield, with shares up 11% in the last year.
Meanwhile, ZDV aims to replicate the performance of the Dow Jones Canada Select Dividend Index, which includes Canadian stocks that have a history of consistently paying dividends. The ETF provides exposure to dividend-paying companies across different sectors. It offers a 4.36% dividend with shares up 7.4% year to date! Together, these cash-gushing investments can be reinvested back into your future and near-term goals.
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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.