Beginning RRSP (401K) - Tilted Forum Project Discussion Community

isis · 06-24-2004, 05:17 PM

Well, here I am, just finished high school this week .. and I'm already worried about retirement.

I'm taking a year of my life off to work and figure out what I need to do and all that stuff. I work in a very, very profitable part of the country (Canada country, that is) and I can work useless jobs for anywhere from $15-$30 an hour. Thusly, since I have nothing to spend my money on (I've already bought myself a vehicle and just about any other material posession my heart desires) I decided that I should save. And save big time.

I once had money in Canada Savings Bonds, but I found them to just be pretty low-interest as I made $21 a year. I'm looking to start putting money into an RRSP. However, being only 18 years old, I'm worried that I might come into some hard times in the next 10 or so years, and need to take out this cash. As you all know, its highly taxed.

Do you think its worth it for an 18 year old to start working on the ole RRSP? If I have the money, I don't see it to be a big problem. Has anyone else started saving this early? Am I just being paranoid? I have this thing about being rich when I retire ;D

Thanks guys.

NoSoup · 06-25-2004, 05:16 AM

Well, I started a 401(k) as soon as I turned 18. If you go to a savings calculator on the web, take a look at how much more money you'll earn if you start it 5 or 10 years earlier. I would suggest that you save a pretty good portion and put it into the retirement accounts, providing that you have nothing else to spend it on, and take the other funds and put them in some stock. Before you invest in stock though, make sure you know the amount of risk you are willing to take, and what your goal for this money is to do. If you listen to Warren Buffet, he basically says to just buy some great companies and hold on to them forever.

Both types of investments are relatively long term, although the stock(s) you'll likely use before retirement. However, while you are going through college it will be (hopefully) growing and when you are done, you should have a pretty decent nestegg.

Yakk · 06-25-2004, 07:14 AM

The penalty you get for taking money out of an RRSP is not being able to put it back in.

It becomes un-taxed when you put it in, and you get taxed when you take it out. So, unless you change your marginal tax rate by a huge amount, it isn't "hugely taxed".

The loss of the contribution room is what really hurts. You can only put 18%(~?) of your income into an RRSP: this room can be held onto indefinately. If you put money in and take it out, you "waste" that resource. There is no other government penalty, as far as I know (other than you having to pay the tax you you deferred).

Money in an RRSP grows faster than money outside an RRSP, simply because the growth isn't taxed.

Take a 10% return inside an RRSP vs outside an RRSP.

Outside, you have a marginal tax rate of say 30%.

After 10 years, the money in an RRSP has grown by a factor of 2.6.

The money outside has only grown by a factor of of 1.97.

After 20 years, the RRSP money is nearly 7 times larger, while the non-RRSP money is only about 4 times larger.

The taxes you pay when you take money out of an RRSP, and the taxes you get back when you put money into an RRSP, basically cancel out.

One last note of caution: capital gains outside an RRSP have tax advantages that are simular to capital gains inside an RRSP. So, it makes some sense if you are diversifying your portfolio to place capital gains assets outside your RRSP and non-captial gains assets inside your RRSP, everything else being equal.

One other amazing feature of RRSPs is their protection against creditors. I have heard they are a shelter if you ever go bankrupt, but I don't know the details nor have I heard a lawyer confirm this.

I am not an accountant, tax lawyer, or in any way professionally related to the investment industry. My knowledge comes from learning about investments for my own personal use, so please take with a grain of salt.

Personally, I've been stuffing money into RRSPs since I was 17 or 18.

Oh yes, and one last thing: when working out your net worth, take ~30% off the value of your RRSPs, to account for the fact you'll have to pay taxes before you can access them.

06-24-2004, 05:17 PM	#1 (permalink)
isis Insane Location: In the Woods.	Beginning RRSP (401K) Well, here I am, just finished high school this week .. and I'm already worried about retirement. I'm taking a year of my life off to work and figure out what I need to do and all that stuff. I work in a very, very profitable part of the country (Canada country, that is) and I can work useless jobs for anywhere from $15-$30 an hour. Thusly, since I have nothing to spend my money on (I've already bought myself a vehicle and just about any other material posession my heart desires) I decided that I should save. And save big time. I once had money in Canada Savings Bonds, but I found them to just be pretty low-interest as I made $21 a year. I'm looking to start putting money into an RRSP. However, being only 18 years old, I'm worried that I might come into some hard times in the next 10 or so years, and need to take out this cash. As you all know, its highly taxed. Do you think its worth it for an 18 year old to start working on the ole RRSP? If I have the money, I don't see it to be a big problem. Has anyone else started saving this early? Am I just being paranoid? I have this thing about being rich when I retire ;D Thanks guys.

06-25-2004, 05:16 AM	#2 (permalink)
NoSoup Non-Rookie Location: Green Bay, WI	Well, I started a 401(k) as soon as I turned 18. If you go to a savings calculator on the web, take a look at how much more money you'll earn if you start it 5 or 10 years earlier. I would suggest that you save a pretty good portion and put it into the retirement accounts, providing that you have nothing else to spend it on, and take the other funds and put them in some stock. Before you invest in stock though, make sure you know the amount of risk you are willing to take, and what your goal for this money is to do. If you listen to Warren Buffet, he basically says to just buy some great companies and hold on to them forever. Both types of investments are relatively long term, although the stock(s) you'll likely use before retirement. However, while you are going through college it will be (hopefully) growing and when you are done, you should have a pretty decent nestegg. __________________ I have an aura of reliability and good judgement. Just in case you were wondering...

06-25-2004, 07:14 AM	#3 (permalink)
Yakk Wehret Den Anfängen! Location: Ontario, Canada	The penalty you get for taking money out of an RRSP is not being able to put it back in. It becomes un-taxed when you put it in, and you get taxed when you take it out. So, unless you change your marginal tax rate by a huge amount, it isn't "hugely taxed". The loss of the contribution room is what really hurts. You can only put 18%(~?) of your income into an RRSP: this room can be held onto indefinately. If you put money in and take it out, you "waste" that resource. There is no other government penalty, as far as I know (other than you having to pay the tax you you deferred). Money in an RRSP grows faster than money outside an RRSP, simply because the growth isn't taxed. Take a 10% return inside an RRSP vs outside an RRSP. Outside, you have a marginal tax rate of say 30%. After 10 years, the money in an RRSP has grown by a factor of 2.6. The money outside has only grown by a factor of of 1.97. After 20 years, the RRSP money is nearly 7 times larger, while the non-RRSP money is only about 4 times larger. The taxes you pay when you take money out of an RRSP, and the taxes you get back when you put money into an RRSP, basically cancel out. One last note of caution: capital gains outside an RRSP have tax advantages that are simular to capital gains inside an RRSP. So, it makes some sense if you are diversifying your portfolio to place capital gains assets outside your RRSP and non-captial gains assets inside your RRSP, everything else being equal. One other amazing feature of RRSPs is their protection against creditors. I have heard they are a shelter if you ever go bankrupt, but I don't know the details nor have I heard a lawyer confirm this. I am not an accountant, tax lawyer, or in any way professionally related to the investment industry. My knowledge comes from learning about investments for my own personal use, so please take with a grain of salt. Personally, I've been stuffing money into RRSPs since I was 17 or 18. Oh yes, and one last thing: when working out your net worth, take ~30% off the value of your RRSPs, to account for the fact you'll have to pay taxes before you can access them. __________________ Last edited by JHVH : 10-29-4004 BC at 09:00 PM. Reason: Time for a rest.