Don't fear an RRSP young investors

One of the first investments you will probably contemplate is an RRSP.

A registered retirement savings plan is a special type of investment account designed to help you save for retirement.

The advantage of an RRSP account -- compared to a regular investment account -- is the tax benefits it offers.

The biggest reason to open an RRSP, which you can do through most banks and financial institutions, is to gain tax benefits.

If you're just beginning your personal finance education, you may not be in an income level that pays taxes at all, but an RRSP can still work in your favour.

"The number one thing I see with young people putting money into an RRSP is that they don't carry their deductions forward," says Nancy Woods, an investment adviser with RBC Dominion Securities.

That means when your income reaches a taxable level, you can apply your previously accumulated deductions to reduce your tax bill.

There are two types of RRSPs: managed and self-directed.

A managed RRSP is a government-registered bank account that holds investments and is looked after by your financial institution. A self-directed RRSP is controlled by the account holder. They both come with fees and in many cases, a minimum investment.

Depending on the type of investments you choose for your RRSP, your risk is either low, medium or high. You can have a mix of holdings that are very safe but won't make much money; some more safe and some less safe that could make you more money if they increase in value; and more less safe that could make you even more money, but you also run a higher risk of losing money.

"My advice on managing risk is that if you can't sleep at night because of the investments you're holding, it's time to find something more conservative," says Woods.

If you pull your money out of your RRSP before you reach retirement age or while your income level is at a highly taxable level, you'll have to pay taxes on the money, which means you'll lose all the tax benefits you gained while contributing.

P.J. Harston is Sun Media's National Business Editor.