RRSPs: Unlock the power of compounding

“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”

The above quote is often attributed to Albert Einstein. Compounding is one of the most powerful forces when it comes to wealth creation. Learning how to harness it within your Registered Retirement Savings Plan (RRSP) can have a significant impact on your financial future.

What exactly is compounding?

Imagine rolling a small snowball down a hill. As it rolls down, it picks up more snow, growing larger and larger until it’s a massive snowball by the time it reaches the bottom. This is exactly how compounding works: the more it rolls, the more it gathers, expanding exponentially.

In financial terms, compounding is when your earnings—whether from interest, dividends, or capital gains generate even more earnings. Instead of just earning interest on your initial investment, you start earning on the interest you’ve already earned.

And don’t forget—your principal keeps growing too! Over time, this has a snowball effect, boosting your wealth in the long run.

Start Early

The key to unlocking the power of compounding is time. The sooner you start, the bigger your snowball.

Even small contributions can add up significantly over the years. Imagine you contribute $1,000 in an RRSP, growing at 5% annually. After one year, you’d have $1,050. In the second year, you’d earn five percent on the $1,050 you made, and not just the initial $1,000. This compounding effect is what accelerates the growth of your portfolio.

 How compounding can help your RRSP 

An RRSP is a great tool for leveraging compounding. Contributions grow tax-free until withdrawal, allowing your earnings to compound without being taxed along the way. Plus, your contributions reduce your taxable income, potentially lowering your tax bill while giving your investments more time to grow.

Maximize your RRSP

The RRSP contribution deadline for the 2024 tax year is March 3rd, 2025.

For 2024, the contribution limit is $31,560, or 18% of your earned income—whichever is lower. Unused RRSP contribution room from previous years can also be carried forward. To check this amount, simply consult your 2023 CRA Notice of Assessment or log into your online CRA profile. You can contribute to your RRSP through online banking as well.

Start saving now and watch your wealth grow over time—thanks to the magic of compounding!

If you would like to discuss RRSP accounts or other investment accounts further, please contact your CAPCORP financial advisor or simply reply to this email for more information.