Magnus said:
Can a fellow Canadian explain to me why I should bother contributing to my RSP right now in my mid-20's when I'm only working a couple of low-paying part-time jobs?
My feeble mind (when it comes to math, taxes, accounting, etc) is trying to wrap my head around the concept, and as I understand it, it's designed to help people essentially reduce their income during years where they're in high tax-brackets (say, 40%) and essentially store that income away to be retrieved later when they retire and their bracket might be only 20% or whatever.
As a part-timer/student, I'm in as low a bracket as it gets. Why squirrel the money away now? I'm a little hesitant at stowing my money away into a system I don't fully yet understand, but I have everyone in my family (non of my peers have bothered with RSPs yet, to my knowledge) telling me to do this asap and using terminology I just don't understand. :lol
I'm assuming an RSP is the Canadian equivalent of an IRA?
There are a number of reasons to put money in now:
-Start saving for retirement. It is never too early to do this. These sorts of accounts are an excellent way to make yourself save.
-Any money you put into this account can grow tax-free. You will not have to pay any taxes on interest, dividend, or capital gains until you withdraw the money after retirement.
-Reduce your taxes now. Yes, you're in a low tax bracket, but it's still useful to defer taxation, and lower that tax bill.
A classic example to show why opening an RSP now would be a good thing:
Let's say you're 25 and want to retire at 65. That's 40 years, tons of time, right? Yes, but...
If you started saving $2000/yr right now in your RSP, assuming an 8% return, you'd wind up with ~$518,000 at retirement.
If you were to wait 5 years and start at age 30, you'd have to save $3000/yr, or 1 1/2 times as much, to wind up with the same amount of money! Wait 10 years and start at age 35? You now have to save $4500/yr, or 2 1/2 times as much. That's the power of compounding. And that's why you should start saving as early as possible.