When my daughter graduated from high school a couple years ago, I came up with – what I thought – was a fantastic gift idea.
Over the past two years, Alison has worked part time as a cashier at a neighbourhood grocery store. She also filed tax returns for both those years and according to her tax assessment document this year she has the ability to invest $795 in a Registered Retirement Savings Plan. There's no way she is going to save her hard-earned money for a retirement that is 50 years off in the future - besides most of her earnings are long gone.
However, an RRSP contribution from her family would make a great gift. If she takes the money she'll be receiving as graduation gifts and invests $795 in an RRSP and it grew by 5% each year after 3% annual inflation, over the long term (50 years) she could end up with over $9,000. She would be getting back all the money she made over the past two years – granted she'll have to wait for it.
Let's say Alison is able to put another $500/year into her RRSP for the next 50 years. She would end up with $114,000 which could supply her with an additional annual income during her 25 years of retirement of over $8,000.
Even if she just contributed $500 a year extra to her RRSP until she is 30 she would still have over $10,000. Those RRSP funds can be used to buy her first home under the Home Buyer's Plan or even to further her education under the Life Long Learning Plan where you can take out money from your RRSPs to further your education.
An RRSP contribution - a gift that keeps on giving.
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