RRSP & Tax Reduction

It was explained to me a long time ago, that putting funds into a Registered Retirement Savings Plan will reduce your income dollar for dollar, also reducing your tax liability at the same time.

If I make $50,000 in a calendar year, and put $1000 of it into an RRSP, I will only be taxed on $49,000 of income that year. It's like that $1000 doesn't exsist.

The $1000 can grow inside a sheltered account or investment, and I do not have to pay tax on the $1000 of income or the growth until I take it out of the RRSP.

Simple, right?

They why the heck haven't I been doing it? For many, many years, I thought that because I was young, I could always catch up on my contributions in the future. And truthfully, retirement seemed so far off, that I didn't really think about it. It was something I knew about, but didn't really internalize.

Now as I'm edging my way to 40 years old, I know I have to get off my rear and get working on this. Seriously working on this. Being self-employed means no grand company pension when my time for the golden handshake comes. I have a rather large goal to set aside money in my RRSP next year. For me, putting away $3600 for something that isn't a vacation is going to be tough.

I opened my RRSP with PC Financial this year. Over the course of the year, I have managed to deposit a measly $1000. But it's a start. It's more than I have ever had put away for retirement before.

For the year of 2011, I am planning on depositing $3600. That translates into $300 per month. Which wouldn't be too hard on us. Except when we have down months, and I'm taking from the savings coffers to pay the regular bills. The winter months are usually very busy with work, but slow for income. So I have to figure out how to carve something, anything from the budget so that I am making a deposit every month.

My RRSP payment schedule will look something like this:

January: $100 (still owing $200)
February: $100 (still owing $400)
March: $200 (still owing $500)
April: $150 (still owing $650)
May: $300 (still owing $650)
June: $500 (still owing $450)
July: $500 (still owing $ 250)
August: $1000 (paid ahead $450)
September: $300 (paid ahead $450)
October: $200 (paid ahead $350)
November: $100 (paid ahead $150)
December: $150 (balance to zero)

I know some months I will be able to put in more than what I have set out for, and other months, finding the money to deposit will be next to impossible. But this is about as close to reality as I can make it. Unless I scheduled no payments at all, and then just dropped in the whole $3600 in June or July.

I have got to get working on opening a mutual fund account so that I can get the dollar-cost averaging thing working for me too. Because having my retirement nest egg (ok, it's just a couple twigs right now) just sitting in a savings account isn't really what I need. I need my little stash of money working hard, like I do.