A tried-and-true strategy to save for retirement
There are many ways to save for retirement. Some Canadians have access to a retirement savings plan through their employer, allowing them to make additional contributions, often with the benefit of employer matching contributions. In terms of personal savings, you basically have two options: registered and non-registered savings.
Registered savings plans – like a Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) – are “registered” with the Canada Revenue Agency (CRA). That means the CRA decides how much you can contribute each year to these plans, what you can invest in (mutual funds, ETFs, GICs, individual stocks and bonds) and how withdrawals will be taxed.
Non-registered investment accounts do not offer the tax savings and deferral benefits of registered options. This type of account provides easy access to your money and you have complete control over how much you contribute or withdraw, but all investment income is taxable.
RRSPs provide you with important tax advantages. First, there’s the immediate tax benefit of being able to deduct your RRSP contributions on your income tax return. The higher your marginal tax rate, and the more you contribute to your RRSP, the greater the tax benefit.
However, there are limits to how much you can contribute each year. For 2017, you can contribute 18% of the income you earned in the prior year, up to a maximum of $26,010, less any pension adjustments, plus any unused carry-forward room.
Also, any income and gains you earn on investments held within your RRSP will grow tax-deferred until you begin withdrawing money from your RRSP or RRIF in retirement. At that point, all withdrawals are taxed as ordinary income at your marginal tax rate. There are still a few benefits here though, because you may be in a lower tax bracket by the time you make those withdrawals than when you were working, and you may be able to use income-splitting strategies between spouses.
You’ve been growing your RRSP effectively over the years and may be inclined to access it for short-term needs. With a TFSA or non-registered investments, you may be tempted to dip into your retirement savings if a major expense comes up. Try that with your RRSP and it will cost you in a couple of ways. First, there is the steep withholding tax of up to 30%, and second you lose the contribution room associated with those funds permanently.
That said, there are a couple of other ways to use your RRSP, which may provide additional benefits.
The Home Buyers’ Plan allows you to withdraw up to $25,000 from your RRSP to buy or build your first home. You have 15 years to pay back the amount you withdrew, starting the second year after you buy (or build) your home.
The Lifelong Learning Plan lets you borrow up to $10,000 a year from your RRSP ($20,000 maximum over four years) to go back to school full-time, if your school qualifies under the program. Again, there are rules about how and when you’ll need to pay back this money.
This information has been provided by RBC Global Asset Management Inc. (RBC GAM) and is for informational purposes only. It is not intended to provide legal, accounting, tax, investment, financial or other advice and such information should not be relied upon for providing such advice. The information contained herein is from sources believed to be reliable, but accuracy cannot be guaranteed. Please consult your advisor and read the prospectus of Fund Facts document before investing. There may be commissions, trailing commissions, management fees and expenses associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. RBC Funds, BlueBay Funds and PH&N Funds are offered by RBC Global Asset Management Inc. and distributed through authorized dealers.
® / ™ Trademark(s) of Royal Bank of Canada. Used under licence. © RBC Global Asset Management Inc. 2017
Time is on your side
when you start saving
for retirement early.