Can I start an RRSP even if I don't have a full-time job yet?

Gena Katz, a chartered accountant and principal with Ernst and Young, has the answer.

Gena Katz 26 February, 2004 | 2:00PM
Dear Expert:

I'm one of the lucky few: a debtless student, about to graduate and (hopefully) enter the work world. But right now, at age 21, with no permanent full-time job yet, should I start an RRSP on my own (can I even do this?) or save up money in a high-yield account (like ING) and transfer that money to an RRSP in the future, when I have a real job?

Expert Answer:

You can begin contributing to an RRSP if you have contribution room. Even if until now you have only held part-time jobs, the income you earned will have created some contribution room if you reported it on a tax return, though it will likely be quite small. (Your 2005 Notice of Assessment will tell you exactly how much.) Your RRSP contribution room for a year is calculated by multiplying your prior year's earned income by 18%, and can't exceed a certain amount fixed by the tax department every year. The maximum contribution for 2006 tax purposes is $18,000. (Earned income includes, among other things, employment income, business income, income from research grants and net rental income.) Contribution room accumulates every year that you earn income and is drawn down according to the RRSP contributions that you make.

Now to the question of depositing money to an RRSP compared with non-registered saving. The investments that can be made within an RRSP are in many cases the same as investments you can make outside the plan, so the question is not which can provide a better return. The benefit of an RRSP is that contributions to the plan are tax deductible and you don't have to pay taxes on any income received from investments within the plan until you cash out.

In your case, if you have very little or no income and therefore have to pay no taxes, there may be no tax benefit to contributing to an RRSP. That said, you could delay contributing to an RRSP until future years when you will be in a taxable position, or alternatively, you can make contributions now, but delay claiming the deductions until you earn a higher income and are in a higher marginal tax bracket, thus getting a tax benefit from the deduction.

To find out how much an RRSP contribution may save you, try Morningstar's RRSP Calculator.

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Gena Katz

Gena Katz