RRSP’s - How Do They Fit into Your Retirement Strategy
Planning for retirement is an exciting step to take towards your future! It means you’ll finally have the free time to get back to that hobby you haven’t had time for, spend more time with your family, or travel and explore new places. After a lifetime of hard work, you’ve earned your retirement, but will you be financially prepared? Investing in an RRSP can ensure you’ll have financial freedom during your golden years.
What is an RRSP?
An RRSP, or Registered Retirement Savings Plan, is an investment specifically designed to help Canadians save for their retirement. RRSP’s are available to Canadians of any age that have employment income and file tax returns. They are available to stay open until the account holder reaches the age of 71, at which time you can choose to withdraw the total savings as a lump sum (not recommended), convert your RRSP to a RRIF (Registered Retirement Income Fund), or purchase annuities.
Although RRSP’s may not be as flexible as some of their alternatives, they are one of the best ways to save for your retirement because:
They are registered with the Canadian Government
An RRSP can offer diversified investment holding based on your personal level of risk and types of investments offered by your independent financial advisor
An RRSP offers tax benefits to the contributor(s)
You can include your spouse or partner in a shared RRSP that will assist with income splitting during retirement
You will enjoy the benefit of tax deferred growth on your gains AND a tax deduction that reduces your taxable income by your contribution amount (to a point; it is important to discuss this with your financial advisor).
How an RRSP Works
Opening an RRSP is only the first step to enjoying the many benefits it has to offer. The next step is to understand what your role is for contributing in order to make the most out of your investments. RRSP’s come with their own rules surrounding contributions, withdrawals and tax implications so it’s important to understand how these can impact your savings plans.
When contributing to your RRSP
You are permitted to contribute an amount that is 18% of your income from your previous yearly income OR an amount that is specified by the Canadian Revenue Agency for the current year. This is called your contribution limit. If you contributed UNDER your contribution limit in the year prior, you are also entitled to contribute the left-over room to your RRSP for the current year. Unused contribution space is carried forward, so you can take full advantage of your RRSP! Your unused carry forward amount is determined by the CRA and noted on your notice of assessment each year.
What happens if you need your RRSP savings before you retire?
Life happens, and sometimes we need those savings for something else. Withdrawing your savings from your RRSP is an option, but the income is subject to penalties. Depending on the dollar amount of your withdrawal your financial institution is required to withhold tax from 10-30% and will forward this to the government. Additionally, the money you withdraw will also be considered “income” and therefore be taxable by the CRA. This may affect the tax bracket you fall under and subject you to a different tax rate, so it is important to look at all the pros and cons carefully before making a withdrawal. Your financial advisor may have alternative options that could give you the flexibility to keep a portion of your investments in a more accessible plan, so be sure to ask about all your options as well.
Using your RRSP for your retirement
Allowing your money to grow in an RRSP until your retirement means you can rest easy knowing you’ll enjoy your retirement years without financial strain. Remember, your RRSP account can stay open until you reach the age of 71, so allowing your money to grow as long as possible is highly recommended. When the time comes to enjoy all that life has to offer, you can withdraw your savings a few ways:
You can withdraw the full amount as a lump sum (not recommended), also called collapsing your RRSP. This gives you full access to the entire amount withdrawn.
You can convert your RRSP into a RRIF or Registered Retirement Income Fund. When converting your RRSP to an RRIF, your financial institute, trust company or Insurance company will automatically withhold a minimum amount of tax. You may increase the amount of tax you would like taken off if you have other forms of income and you do not want to end up owing tax each year. You may choose to take your income month, quarterly, or on an annual basis.
You can use your savings to purchase an annuity. In this case, you will receive a fixed sum of money paid annually for the rest of your life.
Although RRSP’s are not the only way to save, they are certainly one of the easiest ways to get started in securing the funds you will need in your future retirement. Having a strategy in place that incorporates your work, money and life goals along with your budget can make your retirement dreams achievable and Darryl Smith with Synergy Life Financial is always happy to help! The first step to professional advice and exceptional service that can help you grow your money is to give him a call today at (705) 434-0562.