It’s never too early to start investing. We encourage everyone to start as early as possible! We know many young people don’t have high paying jobs right now, maybe are still in school, or trying to pay off student debt. It is still important to put aside some of your money for your future. It doesn’t have to be a substantial amount. The general rule of thumb is to put aside at least 10% of each paycheque. There are two accounts we would recommend investing in: Tax Free Savings Account (TFSA), and Registered Retirement Savings Plan (RRSP).
A TFSA is a great way for young people to invest, with a lot of benefits. The accounts are tax free, as the name states. Whether it is the growth of your account, or dividends paid, the government will not touch your money from that account. The only way to get taxed on your investments is by going over the maximum contribution limits. The tax amount is a 1% monthly tax on the highest excess amount for that month. This will continue to happen until the excess amount is withdrawn or become eligible to be used for next year’s contribution. To qualify for a TFSA you need to be a Canadian resident, aged 18 or older, and have a valid SIN (Social Insurance Number). There is a limit on the amount you can contribute each year. Your eligibility begins at the age of 18. If you turned 18 in 2009 or before, your maximum contribute amount is $31,000. Those who turned 18 after 2009 will have less that they can contribute. From 2009-2012, the maximum limit per year was $5,000. In 2013, it rose to $5,500 each year because of inflation. While your money is in a TFSA you can still invest in stocks, bonds, GIC’s, mutual funds, and ETF’s. To be clear, there is a maximum contribution limit, but the growth on your investment does not count towards it. There is also no maturity and no age limit on contributions!
The other account to consider is an RRSP. It is never too early to save towards your retirement, and that is what this account is all about. This account was created to help Canadians save money for a comfortable retirement. There are major benefits to opening up an RRSP, and also some facts to be aware of. There is a contribution maximum to your account, but unlike the TFSA they are not fixed amounts. The amount is 18% of your prior years income, minus pension adjustments. You are encouraged to keep the money invested until retirement. There might be situations where you do need to access the funds though, such as buying your first home. The home buyers plan is for first time home buyers, where you can take out $25,000 tax free, as long as you pay back the required yearly amount over 15 years. If you are in need of funds and the RRSP is your last resort, you can take out money but will incur a tax expense, depending on the amount withdrawn (talk to us about this option). The money contributed to the RRSP is tax deductable, so you can save money on your income taxes. The money growth on investments are tax deferred (aren’t taxed until you start to take out from the account). The RRSP matures at age 71 and converts into a RRIF (Registered Retirement Income Fund). This means, that you are not able to add more funds into your account, and have to take out a minimum percentage on a yearly basis. Instead of paying into the RRSP, the RRSP pays you!
If feeling uneasy investing because of the market, don’t fret. There are different types of portfolios for everyone. Before investing you will be asked about your risk tolerance and we will build your portfolio around that. If you are someone who would be uncomfortable with fluctuation in your portfolio, you will choose a lower risk option. If you are comfortable with some fluctuation, then you will choose more of a moderate option. If you can deal with huge fluctuation and still feel confident, you would choose the high risk option (remember the higher the risk, the potential for a higher loss). Depending on your situation, it may be recommended that younger people go with a riskier option as it could give you faster growth, you have less money to play with, and you have more time to gain that money back in case of a loss (you’re still young). The older you get, the more you want to become conservative and look towards dropping some risk so you can feel comfortable about your retirement planning.
Before investing, talk to us about the different accounts that may be available to you.
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