We've all heard about the importance of planning for retirement, but how many of us have actually put what we know into action? According to a September 2017 report from Statistics Canada, only 65% of Canadians made a contribution to a registered pension plan (RPP), a registered retirement savings plan (RRSP) or a tax-free savings account (TFSA) in 2015.
Not one of the 65%? That's okay! In your 20s, you may feel you have lots of time. In your 50s, you may worry that it's too late to start. The truth is that now is always the right time to start planning for your retirement. How you save will likely differ based on your age and circumstances. A skilled financial advisor can talk about your options and help you make decisions on your path to retirement. In the meantime, let's take a look at the three options mentioned in the 2017 Stats Can report: RPPs, RRSPs and TFSAs.
An RPP is an arrangement with an employer or union that provides retired employees with periodic payments. Both the employee and employer contributions are tax deductible. Contributions and investment earnings are tax exempt until the employee starts to receive the benefits.
RRSPs are government-approved plans used primarily to save money for retirement. Contributions are tax deductible as long as you stay within your contribution limits. This means you get back the income tax you paid on the money you put into the RRSP. This works because you contribute when you are in your peak earning years, when you are also likely paying higher taxes. When you withdraw the funds, they are taxed but typically at a lower rate because your annual income is lower.
The newest of the three savings options, the TFSA, is ideal for younger people early in their careers and those who want easier access to their money. People with lower incomes may benefit from a TFSA because the interest earned is tax-free and money can be withdrawn and reinvested easily. Using a TFSA also allows you to accumulate RRSP contribution room for later on when your income is higher and also your income tax rate! TFSAs let you withdraw funds tax-free and re-contribute the same amount in the future.
According to Statistics Canada, more young people and lower-income families are choosing TFSAs for their savings. Canadians between 35 and 54 tend to use RRSPs because of the tax incentives. At 55, though, people return to TFSAs, most likely because they expect to use the money sooner. It’s never too early or too late to start planning for your retirement. Remember, the sooner you start, the more choices and flexibility you have in how you'll get to your ultimate goal.
March 1, 2018, is the deadline for RRSP contributions for the 2017 tax filing year. If you're new to retirement saving, you may wonder what the deadline means or why it matters. Here's the simple answer: If you can put some money away for retirement before March 1, your taxable income for the 2017 year will be reduced. This will affect your 2017 tax return. The income tax you paid on the money you contribute to retirement savings will be deferred until you pull the money out, typically at retirement, when your income is lower and you are paying income tax at a lower rate.
Want to know more? Call a financial advisor to talk about your options for retirement savings.
At Servus, we work with our members to understand their goals and provide the products and services that will get them there. We guide you on your journey to financial fitness with a plan that’s just right for you. Learn more about planning your retirement or call us at 1.877.378.8728 to book an appointment.