Investing for your retirement helps to ensure you'll have the savings and income you need to live comfortably, travel or pursue whatever new dreams you choose once you leave the workforce.
There are many different ways to save for your retirement. Because of its tax benefits, a Registered Retirement Savings Plan (RRSP) is the preferred way to invest for many Canadians. However, non-registered investments and Tax-Free Savings Accounts (TFSAs) offer opportunities to save beyond your allowable RRSP contribution limit.
The maximum amount you can contribute to an RRSP annually is 18% of your prior year's qualifying earnings (up to an annual limit of $24,270 for the 2014 tax year), less any applicable pension adjustment, plus any unused RRSP contribution room from prior years and any pension adjustment reversal.
How much will I need to retire?
A CIBC advisor can help you determine how much you'll need. It's a matter of establishing the total income you'll require in retirement, estimating your annual expenses and considering other circumstances.
RRSPs and non-registered investments in your portfolio
RRSPs are held inside a plan registered with the government. Funds contributed to an RRSP are deductible from your taxable income within certain limits. All registered investments grow tax-deferred and funds may be invested in various investment products. Non-registered investments offer a way to save beyond the limited allowable amount you can invest in your RRSP or TFSA. Income earned from non-registered investments is taxable in the year it is earned.
An RRSP lets you put your money into your retirement plan, and save on taxes, too
Simply put, an RRSP is a registered savings plan that allows you to accumulate funds for retirement, while saving you taxes in two ways:
1. Tax savings now: RRSP contributions reduce your taxable income, which may result in a tax refund which you can, in turn, put back into your RRSP (if contribution room is available), or use to pay down debt.
2. Tax-sheltered growth: Investing in an RRSP has a much bigger impact on your savings than investing outside one because both the amount you contribute to your RRSP and the income it earns are sheltered from tax as long as the money stays in the plan. But remember, RRSP assets will be taxed when withdrawn from your plan at the marginal tax rate you're paying at that time.
An RRSP lets you invest more of your income
For example, if you're in a 40% tax bracket and set aside $5,000 of your gross income a year, you'll have just $3,000 after taxes to invest outside an RRSP. However, if you put that $5,000 into an RRSP, the full $5,000 goes towards your investment.
Retirement planning tips
An important part of planning for retirement is thinking about what you can do now to make sure you will achieve your personal and financial goals. Consider these tips to ensure you're doing all you can today, for a better retirement tomorrow.
- Have a retirement plan
- Use all of your RRSP contribution room
- Have an idea of the approximate rate of return on your total investment portfolio
- Consider a spousal RRSP as a means of splitting income and possibly saving taxes in retirement
Converting your RRSP into income
Tax rules require that you convert your RRSP into an investment income option by the end of the year you turn 71. There are several ways to do this. If you choose a Registered Retirement Income Fund (RRIF), your investments stay tax-sheltered. This means you pay taxes only on the amounts you receive each year. And the flexibility of a RRIF means you can personalize how you get your income, in order to meet your individual needs.