It might seem like a long way off, but planning early for retirement can yield higher results and a brighter future. Canadians have the option of starting Registered Retirement Savings Plans (RRSPs) - an investment account registered with the government that allows you to make contributions to regularly while also enjoying tax benefits.
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Statistics show that fewer Canadians are contributing to RRSPs than they were 10 years ago, which could mean that young people aren't thinking about retirement as much as generations before them. Planning for the end of your career certainly doesn't sound exciting, and investing can be intimidating, but read on for simple answers to your questions about this popular way to save.
RRSPs Made Simple
For those without employer-sponsored pension plans, contributing to an RRSP is a smart way to save for the future. Account holders make annual contributions that can be used for straight-forward savings accounts or some types of investments like mutual funds, stocks or income trusts. There are different types of RRSPs, from individually held accounts to spousal which allow some flexibility so that you can find what's right for you. Group RRSP accounts are held by an employer for its employees. Accounts can also be self-directed or you can nominate a financial planner to help you decide where your money should go.
There are three ways RRSP account holders save on income tax. First, what you've contributed (up to certain limits depending on your income), can be deducted from the income you claim on your taxes. Secondly, the income you earn through your RRSP via investments or dividends is also not taxed until you take money out of the account. This means that your RRSP has the opportunity to maintain a higher level of growth than other types of investments because you aren't taxed on that income each year, but rather at the end. Finally, there's a good chance you'll fall into a lower tax bracket by the time you're ready to use the funds, meaning that you'll be taxed less than when you were working and you made more money. (Increasing your savings will provide tax benefits, and peace of mind. Find out more in Maxing Out Your RRSP.)
How RRSPs Work
There are limits on how much of your contribution you can deduct from your income before you file your tax return. That amount is calculated depending on your income from the previous year and other factors like pensions and excess contributions. Excess contributions, that is, if you contributed more to your RRSP than could be deducted for that tax year, could be taxed depending on the amount. Unused contributions that you didn't deduct in a previous year can also be carried forward into future deductions. You can continue to contribute to an RRSP until the day you turn 71.
How to Get One
Banks and credit unions can help you set up an RRSP, as well as some insurance companies. An advisor can help you figure out how much you'll be able to contribute and what options you have for investing within your account. They can also help you choose the best type of account for your individual situation.
Whether you have excess money sitting in savings or you're just beginning to think about how you can better plan for retirement, an RRSP's tax incentives, simplicity and flexibility could be a great option. And even though it seems like an unimaginable time in the distant future, it's never too soon to start saving. (To learn more, see our RRSP Tutorial.)
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