So you’ve probably heard about RRSP and RRSP season… but perhaps you’re wondering what it all means and how can it work best for you?
The Registered Retirement Savings Plans were created in 1957 as part of the Canadian Income Tax Act. RRSP accounts are available to all Canadian residents who file their income taxes in Canada and are under the age of 71. The premise behind RRSPs is, you guessed it! To assist Canadians in saving for their retirement.
The mechanics behind RRSPs are not as simple as the name alludes. RRSP accounts revolve around strict contribution limit rules, receiving a deduction for the contribution and investing them. The next step is to watch their potential for growth, tax-sheltered until retirement, whereby one can take them out, subject to a prescribed minimum, and pay the tax on the initial investment AND any growth.
To make things clearer, I’ll break it down into steps.
When you contribute to an RRSP – taking some of your after-tax dollars and putting them in an RRSP account – you receive the tax you paid on those funds back. The thinking behind this is to put more cash in your jeans while you are young and working and “owing” the taxman down the road. That cash can be used for additional investments in order to generate MORE potential for growth on your money, thus enabling you with the opportunity to save MORE for retirement. In reality, it gives you FLEXIBILITY with your money – allowing you to put those dollars to work in the best place for you! Whether that’s paying down loans, or debt, indulging in self-care or a mental health break (AKA a vacation), or boosting up your retirement portfolio. Having those dollars in your jeans gives the financial POWER back to you!
So now the investment is growing… perfect! You have the flexibility and the capability to invest those funds how you see fit. You can choose to do this on your own, with an Advisor, or a combination of both. You can invest according to YOUR risk and comfort level as well as YOUR interests to determine which companies garner your hard-earned dollars. These are all exciting decisions that enable you with the opportunity to grow your wealth according to your values and goals!
Let’s jump to the stage when you are now ready to retire… The thought process is that you must start withdrawing your RRSP. To do so, you must first convert your RRSP to an RRIF – a Registered Retirement INCOME Fund – in the calendar year when you turn 71. Then, you need to withdraw your first installment from your RRIF by the end of the calendar year when you turn 72. There is a percentage that you must withdraw every year, and it increases as you age… Currently, at age 71, the withdrawal rate is 5.28%.
Overall, the RRSP/RRIF is a phenomenal way to save for retirement – many still argue it is the best method in Canada. However, others say that while the thought process is that you are taxed at a lower rate in retirement than in your working years, this may not always hold true. Between rising tax rates, coupled with many choosing to “work” during retirement, that tax rate argument may not be as solid as it once was. Either way, the advantages are available in your working years, and one can’t predict the future… so why not take advantage of an ability to save for yourself, and your loved ones? To gain more access to my insights, be sure to sign up for my monthly newsletter here or follow me on Instagram or Linkedin.
