Saving For Your Retirement

Planning for retirement is important, and starting to save when you’re young, is just as important. We know most young people aren’t making a lot yet, so finding the money to put away may be hard. An easy way to save for retirement is by having an automatic amount taken off your paycheque. You will have a head start in investing, and not realize you are doing so. An RRSP (Registered Retirement Savings Plan) is an excellent resource to put away money to save up for retirement. There are three different types of RRSPs: Individual, Spousal and Group.

Individual RRSPs are your typical RRSP account. The maximum amount you can put into an individual RRSP account is 18% of your prior years income, less pension adjustments. The growth to the account is tax free, and your contributions are tax deductable. That is one of the greatest benefits to an RRSP. Contributing to this tax deductable account, will save you money every year, as well as help contribute to a comfortable retirement. The one point to remember is that your money is locked away. The money you have contributed becomes untouchable without significant tax, or through special government programs offered. The taxation percentage depends on the total amount being withdrawn from the account. From $0-$5,000 there is a 10% tax rate, $5,001-$15,000 there is a tax rate of 20%, and greater than $15,000 there is a 30% tax rate. Keep in mind also whatever amount is withdrawn from your account can not be re-contributed. There are government programs offered so you can take out a limited amount of money untaxed, namely: the Home Buyers Plan (HBP), or adult learning plan. The HBP allows first time home buyers to take out a maximum of $25,000 to help purchase their first house. This must be paid back within 15 years. The adult learning plan is to help finance full-time training or education for you, your spouse, or common-law partner (not for children). The maximum you can withdraw annually is $10,000 and $20,000 in total. You can withdraw money within four years of your first withdrawal. The amount withdrawn has to be paid back in full at a fixed rate within 10 years. Repayment starts during the second year they stop attending school full-time, or five years after the first withdrawal (whatever comes first).

What is a spousal RRSP? This account is only for spouses, or common-law partners. A spousal RRSP has all the same rules as an individual RRSP, with some moderate changes to fit both your needs. The income tax deduction remains the same. You are still only allowed to contribute 18% of your previous years total income. You are not allowed to add your spouses contribution amount to your income taxes to prevent paying higher taxes, even if you contributed money to it. In the event that you have a spousal and individual RRSP, you can split up your contribution to either account how you see fit, but once again you can’t exceed 18% total contribution. This RRSP is very beneficial for couples that have one spouse in a higher tax bracket. After withdrawing money from your account during retirement you will be taxed at a lower rate, therefore helping you save more money during retirement. It is also beneficial if a spouse is younger than the other. Once you turn 71 you cannot add money to your RRSP. At this stage, your RRSP will turn into a RRIF (Registered Retirement Income Fund), meaning you have to start gaining income from your RRSP. Even though you can’t add money into your account you can still contribute to your spouse’s account. On top of that, when your spouse turns 71, you can take out less at their RRIF rate, saving you extra money on taxes once again. One rule to be aware of is the three year tax rule. The tax rule states, if money is withdrawn from the account by the spouse within the last three calendar years of your contribution, the contributor will be taxed. If money is withdrawn by the spouse after three calendar years of your last contribution, the spouse will be taxed. This is something to be aware of for when the spouse with the lower income decides to take out money. Also, when an RRSP is turned into a RRIF and your spouse’s is still in their RRSP, you are only allowed to take out the minimum allowed amount. If you go over the minimum amount, and three years have not passed since your spouse’s last contribution, your spouse will be taxed.

Some companies will offer their employees a Group RRSP. This is a collection of individual RRSPs offered by some employers. The contributions are taken from employees pretax pay through payroll deduction, reducing your tax burden immediately, instead of at the end of the year. Most companies, who offer this program, will contribute up to a certain amount, based on what you put in. Whatever is being offered, you will want to max out because it is “free money” that you are receiving on top of your investment. Every company will offer different contribution rules so if you are entitled to a group RRSP, talk to your HR rep. to make sure you are maximizing your account. If you leave or are laid off, your money doesn’t stay locked in. This means that you can choose what to do with it whether it is to: keep it invested in an RRSP, reinvest into another account, or convert the money into cash!

Here is an example of savings incurred when contributing to a Group RRSP:

Paid to Employee Contributed to
Group RRSP
Salary $10,000 $10,000
Tax Deducted at source (46%) ($4,600) $0
Contribution to RRSP $5,400 $10,000
Tax Savings $2,484 $4,600

All of us want to retire at some point, why not let us help you get there? We can help set up a plan for you (and your spouse) that will help reach your goals!


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