Monday, September 1, 2014

Saving for Retirement through Gov programs.

In Canada we can contribute to our own pension plan through a program called Registered Retirement Savings Plan (RRSP). In this plan, you contribute and the government defers the taxes on the amount you contribute until you start collecting. 

Many Canadians who do not think about RRSP should/could be contributing to an RRSP this year. Are you contributing? Before you answer that question, let’s check and see how much you really know about RRSPs. 

Although Statistics Canada reports that the total many contribute to their RRSP most wait until the deadline for yearly contributions---which is the last day in Feb. This is not a good idea, planning contributions should be part of your on going retirement thinking. And as September is a month for starting, it should be a time for thinking about your retirement planning.

In Canada,  contributions for RRSP have been around for almost 60 years, despite this many Canadians still don’t really understand what an RRSP is and what it can do for them. Many countries around the world have similar programs that go by different names and may have different rules.

What is an RRSP? An RRSP is a Registered Retirement Savings Plan that is registered with the federal government. It allows you to save money on a tax sheltered basis.

What types of RRSPs are there?

  • Individual RRSP: An RRSP that is registered in the name of a single contributor.
  • Self-directed RRSP: You create and manage your own portfolio, with or without the assistance of a broker.
  • Group RRSP: Group RRSPs are set up at work. The employee and/or the employer contribute money to individual RRSP accounts. Contributions are deducted from paychecks so the tax savings are immediate. Investment choices may be limited.
  • Spousal RRSP:  A Spousal RRSP is typically set up when one spouse has a significantly higher retirement income than the other. It is commonly referred to as “income splitting”. When you set up a Spousal RRSP, the spouse that earns the high income contributes to the other spouse's RRSP. The contributor gets the tax deduction, but the money is now owned by the other spouse. When the money is withdrawn from the spousal RRSP, it's taxed at the lower income spouse's rate.
How does an RRSP earn money? An RRSP is an investment portfolio that may contain a variety of investments including RRSP savings deposits, treasury bills, guaranteed investment certificates (GICs), mutual funds, bonds, and even equities. Many Canadians buy an RRSP and leave it in the savngs or the RRSP account at their local bank/credit union. This type of account is usually pays  below 3% which means the money in the RRSP does not grow very fast. If you invest in an RRSP talk to your financial advisor about how to best invest it and grow it. 

How can you buy an RRSP? You can’t buy an RRSP. An RRSP itself is not an investment; it is an account that holds investments. You open an RRSP.

Who is eligible to open an RRSP? If you are currently working in Canada you may start contributing to an RRSP as soon as you have a qualifying income and have reached 18 years of age.

Where can I open an RRSP? You can open an RRSP through a financial institution such as a bank, credit union, trust or insurance company. You can even open an RRSP online if that option is available to you through your financial institution. 

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