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Youth wise to save RRSP room

The RRSP deadline has passed, spring is just around the corner, and now young people can turn their fancies to income tax. After all, lowering our income tax is why we emptied the seat cushions to make our contributions this year.

What's that? You didn't contribute the maximum amount as all the big banks shamed you into believing you should? Well, don't worry. If you take a closer look at our progressive income tax system, you'll see you're better off saving that tax shelter.

It's the 18-to-34-year-olds who have the most to gain by carrying RRSP contribution space forward for future years. In the final days before Monday's RRSP deadline, Royal Bank of Canada and Ipsos-Reid Corp. released a survey that showed 55 per cent of Canadians in that age group would not be contributing anything for the 2002 tax year, and 56 per cent didn't even have a registered retirement savings plan. The results were spun into a blight on youth.

Cheer up kids: The future's looking bright. Of course, there's no such thing as a crystal ball, but the next best medium with which to see into the future is the trusty Schedule 1 on your federal income tax form. Schedule 1 shows the rate of taxation as an individual's income rises, or in tax terms, progresses.

Income under $31,678 is taxed at 16 per cent. The vast majority of working Canadians between 18 and 34 fall into this category. For every dollar contributed to an RRSP, the investor avoids 16 cents in taxes.

Any income over $31,677, but under $63,354, is taxed at a rate of 22 per cent. Income over $63,354 and under $103,001 is taxed at 26 per cent, and anything over $103,000 is taxed at 29 per cent. That means for every dollar contributed to an RRSP at the highest level the investor will avoid 29 cents in taxes.

Assuming a young person won't be working for less than $30,000 forever, it's not hard to see that it's better to save contribution space for those higher-income years. It's also good to have contribution space on hand for a unusually good year on the job or any other windfall.

The big banks are quick to point out that investing early will give your savings more time to grow, and that's true. But even the Royal Bank/Ipsos-Reid poll pointed out that many young people were not contributing to their RRSPs because they were bogged down by student loans or heavy mortgages. That's exactly where young people should be putting their money.

There are few investments as financially rewarding and risk-free as paying off debt. Save the bulk of your RRSP contributions for when your debt is a smaller portion of your income, and your income is taxed at a higher rate.

What's more of a blight on the nation is how banks advise young clients to maintain current debt levels, and even encourage further debt to make an RRSP contribution. In most cases, one branch of the bank is pocketing your money through the interest on your debt, and another branch is pocketing your money from the fees on the RRSP investments you're making.

Never trust anyone over 35.
Dale Jackson is creator and producer of Report on Business Television's weekly interactive Talking Mutual Funds with Ranga Chand.
This column first appeared on GlobeinvestorGOLD.com. For more exclusive analysis, please see the Web site.

© The Globe and Mail

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