Should I start an RRSP at age 25?

[krdunning]

Hi There!

My name is Kelly, nice to meet you all. I just thought I would ask on this forum because people here seem to have a lot of experience and knowledge and I wanted to do some research before I make a decision.

I phoned my bank today just to do a change of address and they asked me if I wanted to start contributing to my RRSP yet. To be honest I hadn't really thought about it before and now I am wondering if it would be the right thing to do at this stage in my life.

Here is a little info: I am 25 years old and I have no debt. I have about $14,000 in my savings account at the moment and it is steadily growing since I made around $3,000-$4,000 per month as a freelance writer and I live on a a lot less than that because I live a frugal lifestyle. (I have only been doing this freelance writing thing for a short while, so I will be filing my taxes for this year as "self employed" and I am currently in the process of learning how to do that.)

I know that contributing to an RRSP might be beneficial because I will be able to deduct the contribution on my taxes. However, my understanding is that you have to pay the tax anyway when you take it out, so I'm wondering what the difference is?

Also, for the next few years I am going to be doing a lot of traveling and probably not spending a lot of time in Canada. I will be working abroad and traveling around the world. I don't know if that makes a difference, but it means that I can't really predict my income and location for the future. (not that I would want to!) I think I might be self-employed for a good chunk of my life, but I really have no idea.

Would an RRSP be the best option for me at this point? Or perhaps I am better off continuing to save in a high interest account for when my significant other and I want to buy a house in a few years?

I know I might sound clueless, but I am new to all this and I would really like to hear your thoughts.

Cheers,
Kelly

[Daniel A.]

In your spot I would open a TFSA account if you don't already have one.

Good on you for saving and not having debt !!!

When it comes to the RRSP yes in general sooner is better if for no other reason than discipline.
A major consideration though should be saving the room for high earning years.
If you are in a low tax bracket the benefit is not there.
RRSP room accumulates and carries forward to be used in higher income years.

[the-royal-mail]

It's worth pointing out that this is the busy season for the banks and they have been encouraging everyone to contribute to their RRSPs. They are anxious to collect fees on your fund purchases. The moment you agree to an RRSP they'll be selling you mutual funds to populate it.

Because you are uncertain about the future, it's my opinion that you should instead use the TFSA to hold your money. The money won't do you any good locked away in the RRSP in 5-10 years when you really need it. Remember there's no harm in plain old cash as well.

[krdunning]

Thanks guys!

I think you might be right, a Tax Free Savings Account might be my better option at the moment. How exactly do they work, and what kind of interest can you earn on them?

[OhGreatGuru]

...
A major consideration though should be saving the room for high earning years.
...

You don't have to wait until your high earning years to make contributions. You can make contributions now, but not deduct them from your income until a future year. In the meantime the contributions are growing in a tax-sheltered account.

The primary purpose of an RRSP is to save for retirement. With your free-lance career you are not likely to have much in the way of a pension plan. And depending on your tax status in Canada your CPP may be less than maximum if you plan to work outside the country for a number of years.

The counter-argument is that if you are likely to need to tap this money in the next few years, it is probably better off in a TFSA.

[krdunning]

The counter-argument is that if you are likely to need to tap this money in the next few years, it is probably better off in a TFSA.

I think this is an important point... I don't know when I will need to use this money but after thinking about it, it doesn't make much sense to lock it away for a long time, especially with not knowing all of the factors that will change in the next few decades. I'm probably better off keeping it accessible so that I can use it to invest in a house a few years from now.
I don't know even know when I want to retire or if I will be living in Canada when I retire, so it is seeming more and more pointless to try to plan that far ahead.