For many people, RRSPs feel like a foreign language. They have no idea what it stands for or how the account works. Heck, many people struggle to manage their monthly expenses so thinking about their retirement savings may be the last things on their minds. Regardless of what your current financial situation looks like, it’s in your best interest to understand how an RRSP works and how you can take advantage of it.

What is an RRSP?

Registered Retirement Savings Plan is the formal name but it’s not very sexy so we all refer to it as an RRSP. Despite what you may have been told or been led to believe you don’t buy an RRSP. Our RRSP is actually a savings vehicle and we’re allowed to put just about any investment we want in there such as ETFs, mutual funds, stocks, and bonds. RRSPs are exclusive to Canada and they’re registered with the Canadian Revenue Agency (CRA) which is how you get a tax break.

Don’t worry if you’re a new immigrant or not a Canadian citizen, as long as you’ve filed a tax return with the Canadian government you’ll be allowed to make RRSP contributions the following year. If you plan on retiring in Canada, then you’ll likely want to set up an RRSP.

RRSP Advantages

The biggest advantage of an RRSP is the immediate tax refund. This is the main reason why people love using their RRSP to save. When you make an RRSP contribution, the government allows you to deduct this amount from your total income for the year which in return gives you a tax refund. Let’s say you earn $45,000 a year, your company would deduct taxes for the CRA based on that amount. If you made an RRSP contribution of $3,000 you would only be taxed at a total income $42,000 ($45,000 – $3,000) because we’re allowed to deduct that contribution. For many people on a salary, you’ve already paid taxes on that income so there’s a good chance you’ll get a refund from the CRA.

As you can imagine, using your RRSP contribution room can be handy for people who have just crossed the threshold into a higher tax bracket. Your RRSP contributions could put you in a lower tax bracket which is great since it means more money in your pocket.

When you hold investments inside your RRSP they are not taxed. It doesn’t matter what you hold in there as their tax implications no longer apply; this is known as a tax shelter. If you hold your investments in a non-registered account you would get taxed based on the type of investment. Interest, dividends, capital gains, etc. they would all be taxed at their normal rates. Although you can invest in many things within your RRSP, not all investments can be purchased within your RRSP. For example, you can purchase Bitcoin or penny stocks inside your RRSP.

I know a few of your eyes lit up when you read no tax, but the reality is you will have to pay tax on your RRSP eventually. You only get taxed when you withdraw your money at retirement since it would now be considered income. This is still a good thing though because in theory, when you retire, your income will be lower than in your working years so you’ll be in a lower tax bracket.

RRSP contribution limits

There is a limit to the amount we can put into our RRSP. Our contribution limit is calculated at 18% of our earned income from the previous year. If you made $45,000 last year, you would have earned $8,100 in RRSP contribution room. Also note that there is a maximum every year; in 2013 it was $23,820 but you need to be making some serious dollars if you’re getting that much room. You start accumulating RRSP contribution room as soon as you earn an income and file a tax return reflecting that income. You can find out your personal limit by looking at your latest letter of assessment. Don’t worry about not maxing out your limit every year as any unused room gets carried forward indefinitely.

If you’re not sold on an RRSP yet or you don’t think saving is important, let me introduce you a wonderful thing called compound interest. If you saved $1000 a year starting at the age of 25 your money would grow to $228,116.56 when you retire at 65 based on a 7% annual rate of return. Now if you waited until you were 39 before you started saving that same $1,000 you would only have $77,232.18. Time is the key factor when it comes to compound interest. The more time you have, the more your money will grow.

Final word
This is just an introduction to RRSPs so if you need more information check out the CRA website. Also don’t forget your RRSP is just one savings vehicle that you have access to so don’t ignore your Tax Free Savings Account (TFSA) or any kind of company match that may be offered to you especially pensions.

I suppose you could say I became serious about money a few years earlier since I knew the engagement would come eventually. I wasn’t very happy with the services that my bank was providing at the time so it didn’t take much convincing to move my money to an investment firm when a former co-worker of mine became a financial advisor.

My advisor had slick presentations, was always in communication and he made me feel rich. He seemed like a completely normal person. He outlined a plan for me and invested my money in a few mutual funds, best of all the fees were minimal. I had complete faith in him, but fortunately for me, a random encounter saved me from a lifetime of fees.

Thanks to a stranger

For a little while, I was obsessed with the site Redflagdeals.com and would frequent the message board on a regular basis. One of the forums covered personal finance and in there was a thread where a member was asking about the services of the investment firm where my advisor worked. I wrote about how thrilled I was with the service and that I wasn’t really being charged much so it was worth switching.

A few other members started to give their input and started to talk about the high management expense ratios (MER), but I was adamant that I wasn’t paying that much because that’s what my advisor told me. I took him at face value, this was supposed to be a friend after all right?

A random stranger privately messaged me and explained to me what MERs were and how I was definitely paying them. He took the time to explain how MERs worked and how they would affect my returns in the long run. Deferred sales charge (DSC) was also a new term that he introduced to me; if I wanted to pull my funds out I would lose some of my money. Of course, he encouraged that I check on my own and to call the firm’s customer service line to find out what my fees were.

Getting serious about money

I called my investment firm and inquired about the fees, they confirmed that the funds I was invested in had an MER and DSC. After the initial shock, I realized it was time to get serious about money. My advisor didn’t technically lie to me, he did get paid a tiny commission, which was part of the bigger MER. He also never mentioned what a DSC was since I never asked, to be fair, I should have done my due diligence.

I decided to ask my advisor about the fees and lack of transparency and he responded with he could switch my portfolio to more aggressive funds if I wasn’t happy with the performance. That was totally irrelevant to my questions so I took it to a level above him and provided evidence that my advisor had deceived me. There was a quick internal audit, and I had my deferred sales charges waived with the condition I do not further seek compensation, nor do I speak about the firm or advisor involved in public. This is why I’ll never publicly disclose which firm I was with or who my advisor was.

Final word

It was pretty clear to me at that point that the only person that would care the most about my money was me. I took the time to educate myself and put myself on the path to where I am now. That being said, I now recognize that it’s just fine to get a little help if you’re uncomfortable becoming a do-it-yourself investor. You could also work with a fee-only financial planner which is totally worth your money. Just know that everyone needs to get serious about money one day.

If money is tight then we need to make cuts to our spending first. I’ve talked about the importance of having a realistic budget before because they work. If we can cut our expenses even by just a little bit, we can increase our cash flow.

We don’t need to be under financial distress to make more money. I’d argue that it’s in our best interest to have multiple income streams available because well, who doesn’t like more money? Here are some ways to make more money.

Ways to make extra money now

Get a new job – This is easier said than done, but I find most people who complain about not making enough money aren’t putting themselves out there. If you honestly think you’re underpaid or you deserve more, then look for a job that will pay you what you want.

Get a secondary job – Picking up a part-time job on top of your full-time job may sound crazy, but if you’re struggling with your finances then this might be your only option. A secondary job doesn’t have to permanent, but it will help you make more money.

Freelance – Do you have a skill set that people would be interested in paying for? If the answer is yes then do it! Not sure where to begin or how to find clients? Check out the website Elance.com where you can post your services and get matched up with clients.

Sell stuff – If you happen to have anything lying around your home that people may want to buy, then sell it! The odds are you won’t make anywhere near what you paid for it, but it’s better than nothing.

Buy things on sale – This should be obvious, but buying things on sale will save you money. Try using the grocery app Flipp, it’ll tell you what’s on sale at every nearby grocery store so you can then price match at a single store.

Walk dogs – Anyone can become a dog walker, but it does help if you have a flexible schedule and truly enjoy the company of canines.

Tutor – If there happens to be a subject that you know a lot about why not charge people for your expertise? You don’t even need to be an expert, you just need to know more than the person you’re tutoring.

Rent out a room – Airbnb and VRBO have become widely accepted by the public which is great if you have a spare room to rent out. You could earn more if you rent out your entire place, but then you’ll need a place to crash when your place gets booked.

Be a mystery shopper – Mystery shoppers get paid by market research companies to report on their shopping experiences. The pay isn’t great, but you’ll sometimes also get some free stuff which you can sell later.

Fill out online surveys – You won’t earn real money by doing online surveys, but you will earn rewards which can be used to claim gift cards. Online surveys can be great for students who have free time.

Final word

Unless you’re willing to work like a beast, it’s unlikely you’ll be able to make a ton of extra money, but every penny nickle counts. The idea is to supplement your main income without committing too much of your time.