Saving for Retirement with an RRSP
As a newcomer to Canada, you’ve been through a number of major changes recently. Once you begin to feel settled, with a home and probably a steady job, you are likely to start thinking about the future. What steps do you need to take today to make your family’s lifestyle even better in the future?
One very large part of your future is retirement. Where will your money come from when you stop working? What will your life be like? Where will you live?
Saving for retirement is a top priority for Canadians, especially since a large percentage of the population is at or approaching retirement age, and wish to continue their standard of living even after they stop working.
Most Canadians plan to fund their retirement with income from a variety of sources. These include employer pensions and government pensions such as the Canada Pension Plan (CPP) and Old Age Security (OAS). You may be eligible to receive CPP if you have made contributions to the plan through employment income, and OAS if you have lived in Canada for 10 years or more.
However, one of the most important sources of retirement income for many people is personal savings.
A popular way to save for retirement is with a plan called a Registered Retirement Savings Plan (RRSP). This is a special savings plan that is registered with the Canada Revenue Agency (CRA), and provides important and unique tax advantages over non-registered savings and investments.
The Benefits of an RRSP
One important advantage is that the money you deposit into an RRSP helps reduce your taxable income, lowering the overall tax that you pay if you have contribution room. Another advantage is that the interest or investment income earned by the RRSP is allowed to accumulate tax-free while it is in the plan.
Once you reach retirement age, you may convert your RRSP to a Registered Retirement Income Fund (RRIF) or another retirement income source. All money withdrawn from the RRSP is taxable. However, your income may be lower in retirement than during your working years, which means that the rate of tax you may pay could be lower than it was at your peak earning years.
How an RRSP Works
You are eligible to open an RRSP if you are 71 years of age or younger and have a Social Insurance Number (SIN). You must also have created what’s known as “contribution room” by earning qualifying income in Canada in the previous year and filing an income tax return to the CRA.
The amount of your contribution room is calculated based on 18% of the income you earned in the previous year, up to a maximum amount that is set by the CRA:
- 2006 taxation year: $18,000
- 2007 taxation year: $19,000
- 2008 taxation year: $20,000
- 2009 taxation year: $21,000
- 2010 taxation year: $22,000
The amount that you are allowed to contribute in the following years is stated on the Notice of Assessment that the CRA sends you when it processes your tax return.
Your RRSP can contain a variety of types of investments, including mutual funds, savings deposits and Guaranteed Investment Certificates (GICs).
Because there is a maximum amount that you can contribute to your RRSP, it’s important to have other types of investments – non-registered investments – to help you retire comfortably.
Other Ways You Can Use Your RRSP
While RRSPs are intended primarily to help you save for a comfortable retirement, there are other ways that you may use the money in the plan:
- To purchase a home. The Home Buyers’ Plan allows you and your spouse to each withdraw up to $20,000 from your respective RRSP accounts to fund the purchase of your first home. Provided that you repay the amount you withdraw over a period of 15 years, you will not pay income tax on the amount you withdraw to fund the home purchase.
- To finance education. The Lifelong Learning Plan allows you to withdraw money from your RRSP to finance full-time training or post-secondary education for you or your spouse. You may withdraw a cumulative amount of $20,000 over a maximum of four consecutive years, and no more than $10,000 in any one calendar year. You will not pay income tax on the amount you withdraw, provided you repay at least 10% a year, over a maximum period of 10 years.
While these options are a convenient way to achieve significant goals, it’s important to remember that if you do not make the repayments, you will have to pay tax on those amounts.
Flexibility with RBC RRSP Options
Even if your retirement is many years — or decades — in the future, it’s important to start saving today. That way, you can maximize the growth of your investments over time.
RBC offers many different types of investments to hold within an RRSP to suit your investing needs.
Savings Deposits are similar to regular savings accounts. The interest rate increases as the amount of money in your RRSP Savings Deposit increases. This type of RRSP investment offers the greatest flexibility because you can access the funds at any time or move them to a different type of registered investment, such as GICs or mutual funds.
GICs. These investments offer security and safety of your initial investment. RBC offers two main types of GICs: guaranteed-return GICs, which offer a guaranteed rate of return; and market-linked GICs, which offer the growth potential of the stock market while guaranteeing your principal.
Mutual funds. With this type of investment product, you pool your money with other investors to provide a wider range of investment options, with the expertise of a professional fund manager. RBC offers a comprehensive line-up of mutual funds that may be held within an RRSP.
RBC RSP-Matic. Many people find it easier to save for retirement by putting aside smaller amounts on a regular basis. Once you open your RRSP account, you can set up
an RBC RSP-Matic automatic RSP contribution plan, so that regular payments (such as monthly, bi-weekly or weekly) are made from your chequing or savings account into the RRSP.
How to Open an RRSP Account
You can open an RRSP account up to the age of 71. You can also set up an RRSP account for your spouse (known as a spousal RRSP) and make contributions in his or her name. Since the contributing spouse receives the tax deduction, usually the spouse with the higher income makes the contribution. The other spouse — the beneficiary — owns the investments in the RRSP, withdraws the funds and pays taxes on them.
To get started saving for your retirement, just visit your local RBC branch. Be sure to bring the most recent income tax Notice of Assessment (issued by the CRA after you file your income tax return). This form will indicate the maximum contribution you can make.
If you are already a client of RBC, you may open an RRSP by calling 1-800 ROYAL 1-1 (1-800-769-2511), and selecting the Investments option at the prompt to speak with an investment representative. Investment representatives are available 24 hours a day, 7 days a week.
Once your account is open, you can make ongoing contributions by telephone, at your branch, or through Online Banking.
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