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Retirement planning is something you should consider as soon as you enter the workforce and are earning a regular income
A Registered Retirement Savings Plan (RRSP) is an account, registered with the federal government, that you use to save for retirement.
There is a wide variety of investment options available for RRSPs including:
- Mutual funds,
- GICs,
- Index-Linked products &
- Labour Sponsored Funds.
There are a number of benefits to saving in an RRSP:
Contributions are tax deductible
You claim your RRSP contributions on your income tax, so any money you put in your RRSP will be subtracted from your income and you will pay less in taxes.
Savings grow tax free
You won’t pay any tax on investment earnings as long as they stay in your RRSP. This tax-free compounding allows your savings to grow faster.
You can borrow from your RRSP to buy your first home or pay for your education
You can take out up to $25,000 for a down payment for your first home under the Home Buyers’ Plan (HBP). You can also take out up to $20,000 to pay education costs for you or your spouse under the Lifelong Learning Plan (LLP). You won’t pay any tax on these withdrawals as long as you pay the money back within the specified time periods.
You can convert your RRSP to get regular payments when you retire
You can transfer your RRSP savings tax free into a RRIF or an annuity when you retire. You’ll pay tax on the regular payments you receive each year — but if you’re in a lower tax bracket in retirement, you’ll pay less tax.
Unsure about how much you should be contributing?
Try our retirement calculator and find out what you should be saving now to reach your retirement savings goals.
A Registered Retirement Income Fund (RRIF) is an account registered with the federal government that gives you a steady income in retirement.
When you are ready to retire and start using the funds you saved in your RRSP, you can transfer those funds to a RRIF account in order to make withdrawals and use it as your retirement income.
Some benefits of a RRIF include:
Flexible withdrawals
A RRIF can only be funded by a transfer of assets from RRSPs or RRIFs owned by you or a deceased spouse/common-law partner, a registered pension plan or a deferred profit sharing plan.
Continued tax sheltering
While you have to take a minimum amount out of your RRIF each year, the remainder stays tax sheltered. That means your RRIF investments can continue to grow on a tax-deferred basis during your retirement, providing much needed compounded investment growth.
Control over your investments
You have the same investment choices for a RRIF as you do with an RRSP. If you've developed an investment strategy to save for retirement, you can also design an investment strategy to meet your retirement income needs.
Option to convert to an annuity later
If you reach a point in your retirement where a guaranteed stream of income is a more important priority than investment flexibility, you can transfer some or all of your RRIF assets to an insurance company to purchase an annuity, while still maintaining the tax sheltered nature of the assets. You only pay tax on the annuity payments as they're made to you.
If you' are planning to retire within the next few years don't wait until the last minute to develop a retirement income strategy.
From asset mix decisions to income withdrawal strategies, there are many factors to consider when converting from a retirement savings plan to a retirement income plan.
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