Meeting Lifestyle Planning & Future Retirement Saving Goals

An individual RRSP is one of the most common types of personal savings plans. Individuals—as well as their spouses or common-law partners—can contribute to these plans up to an annual limit using a mix of investments, including stocks and mutual funds. 

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Individual RRSPs have two tax benefits that help you save for your retirement:

1. Tax-sheltered growth—Investment income in your RRSP isn’t taxed while within the plan. In most cases, investors won’t have to pay any tax until funds are withdrawn. Because you may be in a lower tax bracket once you’re ready for retirement, your total savings can be significant.  However, if you have pension income and/or income from other sources it may be combined with the funds withdrawn from the RRSP for the purposes of calculating your income tax due.  It is possible to create a tax liability for yourself.  Careful planning is essential to minimize tax implications.
2. Tax deductions—Individual RRSPs can be used to reduce your income tax, as contributions are deductible within specified limits. 

In addition, investors can withdraw funds from their individual RRSPs without being penalized, provided the money is repaid by a specified time. This can be particularly useful for large purchases, like buying your first home or paying for your education. That said, if the withdraw is not repaid within the specified time frame, the amount withdrawn will be added to the income earned in the year and the tax assessed on the total income earned.  The penalties can be significant.  Best not to withdraw if you don’t have the capacity to repay the amount in full within the required time frame.  

There are several qualifications you must meet in order to open an individual RRSP. Simply put, if you have earned income and file an income tax return in Canada, you can contribute to an RRSP until Dec. 31 of the year you turn 71. You must also have contribution room available, which will be stated on your annual Notice of Assessment sent by the Canada Revenue Agency.

One needs also to consider the benefits of a TFSA (Tax Free Savings Account) for Canadians 18 years of age or older, TFSAs are a great investment tool. Unlike traditional savings accounts, TFSAs allow you to increase your savings without having to pay tax on the growth within the account. In addition, TFSAs have the following benefits:

• TFSAs provide flexibility, account owners can use them to save for a variety of uses like home improvements, vehicles, vacations and emergencies. You can withdraw money at any time, for any purpose. Many Canadians invest in a mix of cash, stocks, bonds and mutual funds.
• TFSAs can be used as an alternative source of income following retirement. What’s more, TFSAs do not need to be converted to income, which provides retirees with a tax-free way to save throughout retirement.
• TFSAs are a good substitute for registered education savings plans if you’re not sure your child will pursue a post-secondary education but still want to set aside money for them. 
• Income from a TFSA does not affect an individual’s eligibility to receive:

• Old age security
• Guaranteed income supplement 
• Goods and services tax credit
• Other income-tested benefits and tax credits

• Account owners can contribute up to $6,000 a year as of 2020. In addition, you can re-contribute any amount you withdraw. If you can't make your full contribution in one year, you can make up the difference in future years. The total amount you can contribute is cumulative over the years.  
• If the account holder dies, funds from TFSAs can be transferred to a spouse. This can be done without affecting the spouse’s existing TFSA or contribution allowance.
  
  

At the end of the day, one or both these tools may be right for you along with a mix of other investment vehicles.  The choice of which and the amount of money one invests in each is entirely dependant on what your lifestyle goals are. Many do try to go it alone and some can have success.  Ideally, find an investment advisor that shares your personal values, is a right-fit for you and take the time to listen to what they have to say, ask questions and participate in the development of a comprehensive, flexible and personalized plan that reflects your ability to finance today and that will be able to meet your future lifestyle goals and expectations.  Mistakes can cost you dearly in tax penalties and fees.    

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