A large chunk of Canadians have registered retirement savings plans. However, many of them do not give much thought to them beyond a monthly or annual contribution. There’s plenty to get familiar with. As such, here are four facts about RRSPs that could save you money.
1. Contribute and Pay Your Mortgage
If your RRSP is big enough, you can lend to yourself to finance a mortgage. This is referred to as a “non-arm’s length mortgage” and it allows you to own your own mortgage inside your RRSP and pay yourself interest, which provides a beneficial fixed-income return.
2. Save Those Contributions for Later
Canadians can contribute up to 18 percent of pretax income annually to their RRSP to a maximum of $24,930 for the tax year 2015. Any contribution room can be carried forward year-to-year. If you are a low-income earner, consider not contributing to allow your contribution room to grow. This will pay back in spades when you have a higher income to contribute.
3. It’s Not About the Refund
The focus should be on saving, but people often concentrate on the tax refund they receive based on their RRSP contributions. Remember that you will eventually pay taxes on your savings every time you make a withdrawal. True tax savings are only achieved when your tax refunds outweighs the taxes charged on your withdrawals — otherwise, it’s a wash.
4. Spousal RRSPs Still Relevant
Pension splitting allows the retiree with an employer pension to attribute half of their income to the other spouse, reducing their combined tax bill. This makes things incredibly more efficient. Because of this, some Canadians consider spousal RRSPs a waste if time and effort. However spousal RRSPs still have value for families without workplace pensions. This is particularly helpful during the time before income from an RRIF can be split with a spouse.
The Tax-Free Savings Account (TFSA) lets you save money for just about whatever you want without paying any tax on the growth within the account or on withdrawals.
Since the TFSA is relatively new (it became available in 2009), many Canadians are still unaware of its existence entirely. Here are five points to help you better understand TFSAs and how they can be of use to you.
1. The TFSA Can Hold Almost Anything
Don’t stop at just throwing your extra pennies in the account, almost any investment you can hold in a registered retirement savings plan (RRSP) can also go into your TFSA: bonds, stocks, mutual funds, exchange-traded funds, options, etc.
2. Keep an Eye on Your Deposits
Many Canadians still use the TFSA as a conventional savings account, making regular withdrawals and deposits. If their total of all deposits exceeded the annual limit, they have made an over-contribution.
If you deposit $10,000 and then withdraw it and deposit again in the same year, you are considered to have contributed $20,000 — keep this in mind. Also be aware that moving a TFSA from one financial institution to another (by withdrawing, then re-depositing) may trigger an accidental over-contribution.
3. You Don’t Need To be a Big Saver
You can use a TFSA for even relatively modest savings. You will be able to access the money at any time. This also makes a TFSA perfect to use as an emergency fund. You will have the security of knowing the money will be available if you need it.
4. TFSA and an RRSP Can Work Together
There are several ways to make the TFSA and RRSP work together to improve your financial standing. RRSPs are the recommended choice for long-term goals such as retirement, while TFSAs work better for short-term objectives.
Whether you are approaching retirement age or not, it’s great to be aware of your preparation options for life after work. Sure, you have heard the usual things — RRSPs, TFSAs — but there’s more for you to be aware of. Here are four of the best-kept secrets to a financially secure life after work.
1. Part-Time Work Can Equal Six Figures During Retirement
If your retirement savings are a little smaller than you hoped, consider working part-time during your golden years. Now before you disregard that notion, take a moment to breathe in the following. Let’s say you make $20,000 at your part-time job. That’s roughly what you could expect from the $400,000 investment portfolio. To be reiterate, that little part-time job is the financial equal of a $400,000 portfolio.
2. You Are Not at All Behind
Consider someone who reaches 55 with a paid-off condo and $100,000 in savings. That person can expect their savings to produce roughly $4,000 or $5,000 a year in returns. Since that person is too young to collect Old Age Security and CPP, retirement at 55 seems very impractical.
But let’s take a look five years down the road. Say this person really hunkers down and contributes $10,000 a year to their retirement fund during that period (and achieves a 7% annual average return) their savings double to $200,000. That can generate roughly $8,000 to $10,000 a year in income for as long as they grace the earth. At the appropriate age, they can also start collecting Canada Pension Plan. Combine those sources of income with part-time work and retirement becomes a viable and secure option.
3. The Government Provides More than you Think
CPP and Old Age Security is on the rise in 2016 and both will provide you with a combined total of roughly $1,660 a month (if you’ve worked in Canada your entire life and retire at 65). If you span that out over a year, that’s just a shade lower than $20,000.
4. Free Money Up for Grabs?
Talk to your human resources department to make sure you’re not missing out. Publicly traded companies typically offer employee stock ownership plans with an employer match. If you buy let’s say $80 of your company’s stock each month through such a plan, your employer will contribute an additional $20 a month — an instant investment return of 25 percent. Other companies offer retirement plans in which the company matches your contribution dollar for dollar.