You work very hard throughout your career so that you can retire and lead a comfortable life, however alot of retirees quickly learn that they haven't saved enough and end up working to pay for basic living expenses. This is why its important so start early and grow a nest egg that you can rely on to fund retirement, as well as your dreams to travel, buy a home, start a new career etc.
The earlier you start the process the better due to compound interest and compound returns.
A Registered Retirement Savings Plan (RRSP) is an account, is a registered investment account with the federal government that you use to save for retirement and enjoy some benefits along the way. RRSP Contributions have various tax advantages compared to investing outside of tax-preferred accounts. Anyone who files an income tax return and has earned income (as an employee) can open and contribute to an RRSP. There are limits on how much you can contribute to an RRSP each year. You can contribute up to 18% of your earned income in the previous year or the maximum contribution amount for the current tax year. If you are a member of a pension plan, your pension adjustment will reduce the amount you can contribute to your RRSP.
RRSP contributions can defer and potentially lower the amount of income tax you pay. This means you can enjoy immediate tax savings from your tax return. The greatest benefit is that your investments grow tax free in the investing years until you wish to withdraw capital. To be eligible for deduction in the previous tax year, your RRSP contribution must be paid before the end of the first 60 days of the current year.
This year, the RRSP contribution deadline for the 2016 tax year is March 1st, 2017.
In summary through RRSP investing, you will realize immediate tax benefits during the times that your income is generally highest (the working years). The total amount of your annual contribution can be deducted from your gross income at tax time, reducing the amount you pay in income tax that year. The income earned in your RRSP is not taxed until it is withdrawn.
Once you stop working and want to withdraw the funds your annual income will be lower therefore you will be taxed in a lower bracket than in your earning years. Funds withdrawn at that time will benefit from the lower tax rate. There are also Special features of RRSPs that allow you to do further tax planning or use your RRSP to fund specific life events.
When you hold stock or mutual funds in a non-registered account, you only have to pay taxes when you sell your investments. If you sell your investment at a profit, you must claim a capital gain; if you sell your investment at a loss, you can claim a capital loss. For registered account like RRSP, you don't have to worry about calculating the taxes for your gains or losses. The RRSP is also superior to the TFSA when it comes to holding international stocks. TFSA is not recognized by other countries as a registered account so you don't get the advantage of tax free dividends.
Interest income is the least tax efficient income stream. Examples of interest income include savings accounts, terms deposits and bonds. You are fully taxed on any interest earned. Even if you roll over your interest, you must include it as taxable income on your returns. For that reason, consider holding interest income in a tax-sheltered account like your RRSP or TFSA to maximize your tax savings.
A Self-directed RRSP is an RRSP account allows you to hold different types of investments consolidated within one single account. Some RRSP accounts only allow you to gold mutual funds, other RRSP accounts will only have GICs. Self-directed RRSPs give you more investment freedom and control.
If you decide to claim some withdrawal from your RRSP, you can do it through Home Buyers’ Plan and Lifelong Learning Plan.
The HBP allows you to borrow up to $25,000 from your RRSP to buy or build a home. To take advantage of the HBP you must be a first-time home buyer or haven’t owned a home in the last five years and you must repay the money within 15 years.
You can also borrow from your RRSP to finance education for yourself or spouse through the Lifelong Learning Plan. The LLP allows you to borrow up to $10,000 a year, up to a total of $20,000. To participate in the program the student must be enrolled on a full-time basis in a qualified program. You’ll have 10 years to pay back the money without being taxed. Overall it is a major benefit to start saving in an RRSP if you would like to reduce your income tax and start building assets.
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