Personal retirement savings
Think about your retirement. Who do you think you’ll spend it with? And what will you do with the new found time? Whatever it is, you need to know that the money provided by the Canada Pension Plan is not designed to be your sole source of income during your retirement (in 2018 the CPP maximum benefit was $1,134.17 each month, but in 2016 only six per cent of Canadians actually received the maximum amount). Personal retirement savings (and a workplace pension plan) should be maximized if you want a comfortable retirement with room for splurges.
The good news is that there are many options to save for retirement. These might include tax-assisted arrangements such as Registered Retirement Savings Plans (RRSPs) or Tax-Free Savings Accounts (TFSAs) as well as non-registered savings and investments like annuities, bonds, guaranteed investment certificates (GICs), stocks or mutual funds. If you’re overwhelmed by the prospect of saving for retirement at your age, when there are so many other things to do with your money – mortgage, education, kids, travel – start small. You’ll be surprised at how even putting just $50 into a savings account each month will grow! The savings plans particularly suited to retirement are:
Registered Retirement Savings Plans (RRSP)
RRSPs are offered through financial institutions such as banks, credit unions, trust and insurance companies, and are approved by the Government of Canada. Contributions to RRSPs can be used as a tax deduction, which reduces the amount of tax you will pay on your income. There is a contribution limit each year of 18 per cent of your earned income, or up to the maximum limit set by the Canada Revenue Agency (CRA). In 2017 the maximum limit was $26,010. It is a good idea to know what your contribution limit is, and you can do that by checking your tax return from last year. Depositing more than your contribution limit means you will be taxed on the extra money you put in. If you deposit less than your contribution limit, you can carry forward the unused room to next year.
Any investment income you earn in the RRSP is usually exempt from tax as long as the money remains in the RRSP. Generally, you will have to pay tax when you withdraw from your RRSP at retirement. However, for most people their tax rate will be lower in retirement since they won’t have a lot of income, so you’ll end up paying less tax. There are special circumstances when you can withdraw money from your RRSP before retirement without paying tax, such as using it to buy your first home or for educational purposes. You will be required to repay this money over a 15-year period if you borrow under the Home Buyer’s Plan, or 10 years for the Lifelong Learning Plan.
To learn more about RRSPs, visit the Government of Canada’s website .
Freelancing and still saving for retirement
Craig is 26 and lives in Ottawa with some of his friends from college. Craig is a wedding photographer and loves his job. He gets to travel to some cool places for his clients’ weddings. Once he was flown to Dubai for engagement photos! While Craig loves his job, he doesn’t have any benefits or a pension. He believes he still has time to save for retirement but he also knows that he doesn’t want to work until he’s 65, so he puts away five per cent of every wedding gig into an RRSP using a robo-advisor. While five per cent doesn’t seem like much, he knows that with time, it will grow into a good amount, and plus, it’s all he can afford.
Tax-Free Savings Accounts (TFSA)
TFSAs are another way for you to save for your retirement. If you have a short-term goal, you can save for that using a TFSA as well. You have to be at least 18 years old and have a valid social insurance number to set money aside in a TFSA. Contributions you make to your TFSA cannot be used as a tax deduction, but any withdrawals or earnings are completely tax-free.
Be cautious as there is a limit to how much you can contribute annually towards your TFSA. In 2018, the limit was $5,500. If you over contribute, you’ll pay a penalty on the extra amount until you remove it. If you don’t contribute to the maximum this year, you can carry forward the unused room to next year. To learn more about TFSAs, visit the Government of Canada’s website .
Set up automatic transfers from your bank account on payday that get deposited directly into these plans. This makes it easier for you to save for retirement, as you won’t have to think about transferring money. Plus, what you don’t get in your wallet you can’t spend!
Differences between TFSAs and RRSPs
You may be wondering what the difference is between TFSAs and RRSPs:
- RRSPs are used solely for retirement savings, but TFSAs can be used for anything.
- Contributions towards RRSPs are tax deductible, meaning you can deduct your contributions from the income you report on your tax return. You’ll get taxed less as you are seen as earning less. Contributions towards TFSAs are not tax deductible.
- Withdrawals from RRSPs at retirement are taxed, but TFSA withdrawals are not, at retirement or otherwise.
- December 31 of the year you turn 71 years old is the last day that you can contribute to your RRSPs. You will need to decide what to do with them – either withdraw them, transfer them to a Registered Retirement Income Fund (RRIF) or use them to purchase an annuity. You can contribute towards your TFSAs until you pass away.
- You can only open up a TFSA if you’re 18 years old, but you can open up an RRSP at any age, so long as you have an income.