RRSPs were created to allow all Canadians to take responsibility for their retirement planning. RRSPs are the only way the self-employed and those individuals employed by small companies who don’t offer a pension plan have of saving for their retirement on a tax-deferred basis. This tax-deferred savings option has been available to members of government and corporate registered pension plans for decades since contributions to these plans have never been treated as taxable benefits.

For those who are fortunate enough to have a pension plan at work, the question then becomes, “Should I also be contributing to an RRSP?” Well, like most things to do with money, it depends.

The first thing you have to figure out is how good your company pension plan is. Is your plan well funded? Is it well protected? And will it provide what you’ll need to retire comfortably? You’ll need to go ask your plan administrator some questions before you decide.

As I said earlier, the teacher’s pension is terrific. And if you have a government pension (if you’re a civil servant, a policeman, a fireman or a nurse, for example) and plan to work until you qualify for full benefits, then you’ll probably be fine sticking with your pension plan.

Think about when you’re likely to retire too since most pension plans penalize you heavily for drawing benefits before the normal retirement age. If you think you may want to drop out early, then having some money in an RRSP might be a good idea. But if you’re going to sweat it to the very end, you’d be better off maximizing your TFSA every year before looking at an RRSP.

If you decide you do want to contribute to an RRSP even though you belong to a pension plan at work, know that the calculation is slightly different for you than for folks who don’t have a pension plan, since the contribution to the pension plan affects how much you can put in an RRSP.

A pension adjustment (PA) is calculated to equalize, at least somewhat, the benefits received by those who belong to a pension plan and those who don’t.  The PA reduces the RRSP deduction and represents is the amount contributed by an employee and/or employer to an employee account in a defined contribution pension plan or deferred profit sharing plan, or the value of pension benefits accrued during the year in a defined benefit pension plan. In many cases, the PA leaves very little RRSP deduction room remaining, so contributions to an RRSP are moot.

For everyone who does not belong to a company pension plan, the question of how much to contribute to an RRSP is easily answered: As much as you can afford up to (this should be your goal) your maximum allowable limit.

The maximum you can contribute n 2009 is 18% of your earned income in 2008 to a maximum of $21,000. So if your earned income — total of  employment income, net rental income, net income from self employment, royalties, research grants, alimony or maintenance payments, disability payments from CPP or QPP and supplementary UIC payments — is $35,000, your contribution limit would be 35,000 x 18% = $6,300.

Don’t let a big number put you off; even a small contribution made early and regularly will put you in a better place than totally ignoring your future. And  an RRSP is still the best way to plan for the future and beat back the tax man.

I hate writing about RRSPs during the “season.” While everyone is focused on getting their contribution in before the deadline — and FIs are throwing ads in every direction — it feels like overkill. Though, I must admit, this “season” seemed light on the RRSP messages relative to some others. Anyhoo, now that the deadline is past, it’s time to deal with RRSPs proactively… Let’s get those auto-deposits set up people… just $50 a month to start is fine… and get the habit of savings cast in concrete!

Myths abound, and with the RRSP just past its 50th birthday, there’s been a lot of time to build some funny stories, misconceptions and delusions. Here are the five I run across most often:

Myth #1: You Have to Claim Your RRSP Deduction Each Year. You don’t. While most people do take the deduction for their RRSP contribution from the get-go, there’s no rule that says you can’t hold off. In fact, holding off makes sense when you’ll end up getting more money back from the taxman by delaying your gratification. So if you’re just starting out and earning not-so-much, don’t bother claiming the deduction… save ‘em up until you’re in a higher tax bracket when you’ll get a bigger bang for your buck.

Life changes are another reason to pause and think… Think…THINK…Take the case of a woman who goes off on maternity leave in the middle of the year. Since her income is dramatically reduced for that year, her marginal tax rate will also be lower. Claiming the deduction for her RRSP would mean frittering away a perfectly good deduction on a low-income year. Better to hold the deduction for a year when her taxable income is back up. Then, even though her RRSP contribution limit would be less (based on the previous year’s earned income, which may have been smaller), giving her little room to maneuver when trying to minimize her taxes, her undeducted contribution from the previous year will come in very handy.

Whether you’re having a baby, taking a year off to get an MBA or planning a sabbatical, knowing you can delay claiming your deduction without losing it means you can plan to make those RRSP contributions work even harder in terms of the deduction you’ll eventually receive. They also eliminate the excuse, “What’s the point, I don’t pay that much tax now anyway.”

Myth #2: You have to be over 19 to contribute to an RRSP.  This misunderstanding came about because people under the age of 19 aren’t allowed to make an over-contribution to their RRSPs. However, anyone in Canada who has earned income and has filed a tax return, regardless of age, has RRSP contribution room. That includes kids with a paper-route, those that baby-sit, and children who have promising modeling or television careers.

Even if there’s little point in a child claiming the RRSP deduction because she owes little or no tax, the benefits of contributing to an RRSP makes the exercise worthwhile. First there’s the magic of compounding return. One RRSP contribution of $500 (he’d need an income of about $2,800) at age 10 compounding at an average return of nine percent will grow to more than $57,000 by 65. If your child contributes that $500 every year until 19, he’ll have more than $400,000. That’s a good deal by anyone’s standards, right? The second benefit is that since a child’s RRSP tax deduction can be carried forward indefinitely, when she does start working full time, she’ll have deductions she can use to offset the tax on her income.

Myth #3: If you’re over 71 you’re out of the RRSP business.  Under current legislation, once you turn 71 you can no longer make contributions to an RRSP. If you happen to still be generating earned income, too bad! You’re out of luck. Maybe not. If you’re turning 71 but will continue to have earned income, whether from rental property, a professional practice or business ownership, there’s a way to get a deduction in the year you turn 72, even if you’re not allowed to make an RRSP contribution. In early December of your last year of contribution, make an additional contribution based on your earned income for that year. Yes, that’s technically an over-contribution. And yes, if it’s over the $2,000 lifetime limit, you’ll start incurring the one-percent-per-month fee. But that’ll only happen until the calendar clicks over to the new year so that means only one month’s worth of penalty. Now, even though you’re not allowed to make a contribution, you can claim the deduction for the contribution that you made last year. This could also help reduce your exposure to the OAS clawback by reducing your taxable income. Just remember not to get greedy. Don’t reduce your income to such a low point that you bring the alternative minimum tax into effect.

Also keep in mind that contributions to a spousal RRSP are based on your partner’s age. So even if you are an old geezer, as long as your partner is under 71 you can contribute on his or her behalf and grab a deduction.

Myth #4: You can’t use your RRSP as collateral for a loan. Even FIs don’t understand this one! There are no rules that say RRSP assets can’t be pledged as collateral, although your RRSP provider will likely tell you there are. However, there are consequences. If you borrow against your RRSP, the fair market value of the RRSP assets pledged are included in your income for tax purposes at the end of that year. When the plan’s assets are no longer pledged, you may deduct the amount previously included in your income, minus any loss resulting from using the plan’s assets as collateral.

So why would a person do this? Well let’s say you suddenly find yourself without a job and need to take money out of your RRSP to keep body and soul together. Once you do, there’s no way to put that money back into the plan. Even if you found yourself out of the cash flow squeeze, what’s been withdrawn stays withdrawn and that’s that. If instead of making a cash withdrawal, you used the assets as collateral for a loan, the money would be treated as if it had been deregistered and included in your income at the end of the year. (Here’s one good reason to have a small plan separate from all your other RRSP assets!) So if your cash flow crunch abates in the interim and you repay the loan, you’d remove the collateral obligation. By dong so, your RRSP assets would once again be safely tucked away and you’ll have lost nothing.

Myth #5: It doesn’t matter when you make your spousal RRSP contribution.  This may be so if you never intend to make a withdrawal from the plan, but on the off chance that you do, it matters a lot when the money goes in. The spousal RRSP withdrawal rules are based on “calendar” years. Make a contribution for 2009 by December 2009, and then no further contributions, and you’ll be able to withdraw money attributed only to the planholder as soon as January 2012. Make that contribution some time in the first 60 days of 2010 and you’ll have to wait until January 2013 — a whole year later — before withdrawals are taxed solely in the planholder’s hands.

I’ve been yacking on about RRSPs for years. I figure if the government is going to give us such a huge incentive to save for the future then we’d be fools not to take advantage of it. Yet every year millions of Canadians fail to sock away money in an RRSP. In fact, it’s been estimated that 97% of RRSP contribution room has gone unused. Whazzup with that?

Some people don’t bother with an RRSP because their company pension plans eat up almost all their RRSP contribution room. More often than not the reason people give me for their not jumping on the RRSP bandwagon is that they just can’t afford it. They have no disposable income left over after the rent is paid, the food is bought and the kids are clothed. I empathize. When I left my full time career to spend as much time as possible with my little ones, I’ve often found myself wondering whether the small contributions I manage to make each year would be enough. The answer I keep coming up with is, “It’s more than I would have if I kept skipping my RRSP contributions completely.”

Just $600 a year (which is $50 a month for the mathematically challenged) compounding at an average annual return of 5% a year — not so outrageous a rate of return, eh? — would grow to over $30,000. So, if I put in $15,000 of my own money, over 25 years my RRSP will double. If I have 30 years, my $18,000 grow to over $42,000. And if I have 35 years my $21,000 will grow to over $57,000.

Bump your return up by just one point – from 5% to 6% — and double your contribution, and you’d be amazed at the difference. Your $100 a month will net you more than $70,000 in 25 years, over $100,000 in 30 years, and $142,000 plus in 35 years. C’mon, you can’t tell me you don’t see the point of investing $100 a month to have a nice stash of cash at hand when you finally hang up your spurs.

When presenting the magic of compounding return the media’s focus has been on creating the most impressive story. To make the best case possible, calculations show the maximum contribution compounding at the highest reasonable (and, sometimes, not-so-reasonable) rate of return for a blow-me-away total in the millions. Unfortunately, using this tactic, we’ve managed to blow thousands of would-be contributors away — all those men and women who say, “Well there’s no way I can come up with that kind of cash, so I guess there’s no point in bothering.”

It’s no bother. And there is a point. Opening an RRSP is as simple as filling out a form. In fact, financial advisors have to complete thousands of transactions a day when the deadline draws near, so imagine how easy it must be. And if you accept the fact that everyone has to save, then the only point to be made here is that it’s far more effective to save inside an RRSP than outside one.

Pop into any financial institution and they can do the calculations for you. Or use any of the dozens of retirement calculators on the web to see how the numbers play out. Prove it to yourself.

The nay-sayers often like to position RRSPs as a trap: a way of paying more tax when you finally do start to pull the money, or of reducing our entitlement to government benefits. “Phooey!” say I disdainfully. First off, the tax-deferred compounded growth means you’re earning more inside the RRSP than you could outside a tax-sheltered plan. Second, if you really believe you bear no responsibility to support yourself in your old age, might I suggest you also invest a dollar a week in a lottery ticket.