I recently got mentioned for a little bit of RRSP advice for students that I wrote which you can read at The Dividend Guy. In light of this I decided to give students a little bit of more personalized advice.
First thing students need to know is that the deadline for RRSP contributions this year is February 29th. The maximum contribution is 18% of last year’s income. Students likely will not have a problem with putting in too much, because it is tough to work up a fifth of your money when you make so little and have so many things to pay it to.
Now this is my RRSP experience. I read The Wealthy Barber again over the past summer and the advice to start a RRSP really hit home. I called TD and set an appointment with an advisor. She helped me set up my RRSP with a TD mutual fund. I had $500 to spare and this was all it took to start it. The process took maybe thirty minutes. Then I had a plan set up that I would have $25 deposited into the mutual fund every month. After three of these deposits I was low on money so I cancelled it. So for 2011 I contributed $575 to my RRSP.
RRSP’s are a tax sheltering strategy. The big benefit of it is that you put money in it now and the government is not able to tax this money. Paying less taxes is something I think everybody can agree on is a good thing. The investments within the RRSP grow tax free but are taxed once they are withdrawn. As a student I am not able to make enough money that I actually need to pay taxes. The taxes are taken off every pay cheque but I get every cent of that back the following April. Unfortunately, the money I have contributed now does not add anything to my tax refund, but when I am 65 my tax bracket will be a lot higher because I will (I sure hope) be making a lot more money than I am now. That means the tax sheltering is very detrimental to me and lots of other students in similar situations.
But the refund can be rolled onto higher taxed years. I will defer the tax refund now, because I get the money anyway, and then once I am in a higher tax bracket I will get the tax refund from my RRSP.
This all being said, there is a different, much more beneficial account for students, which deserves a post of it own, which I will make later this week. The TFSA allows money to grow and be withdrawn tax free (hence Tax Free Savings Account). The TFSA is the ideal option for students, but students such as myself can benefit from RRSPs, it just won’t be until we are in the work force, and then again once we are retiring.
I think that students at the very least should open a RRSP, if only for the fact that you will have it open already when you are ready to benefit most from it. Don’t contribute more than the amount needed to open it and make sure you wait to receive your refund until you are in a higher tax bracket.