During our working years, it is important to put money aside for retirement. For each person, this looks different. You won’t do the same as your neighbour, co-worker or sister-in-law.
In retirement, you may receive a pension from work as well as government benefits (CPP, OAS, GIS). To supplement this, it is up to you to create a fund, such as an RRSP or investment portfolio and make contributions over the years. Saving and investing is your responsibility.
After speaking with many retirees, they all say they are very thankful for starting and being diligent at investing over the years. They have pots of money to draw upon to travel, purchase a new car, do renovations, and make gifts to grandchildren or charitable organizations.
If you are twenty-something or in your fifties, it is important to take action.
RRSPs are especially attractive to those people who are employed and receive T4 income. You can take advantage of a nice tax deduction when you contribute money to an RRSP or Spousal RRSP.
RRSP or Spousal RRSP?
All contributions to either plan (your individual RRSP or Spousal) are a tax deduction for you. Whether you contribute to your RRSP or a Spousal is dependent on your current incomes and predicted retirement incomes.
In Canada, income taxes are paid based on how much income you earn. The higher your income, the higher percentage of income tax you pay. In general, a couple with one annual income of $70,000 pays more income tax than 2 people with annual incomes of $35,000 each.
Choose to contribute to a Spousal RRSP if your spouse will have very low or no income in retirement. This will spread your retirement income over two people and likely, you will pay less income tax between the two of you.
This is smart planning.
Annual or Monthly Contributions?
This is a personal preference. Some say monthly contributions are best because of ‘dollar cost averaging’ and others say annual.
Dollar cost averaging relates to investing. This means that you set up an RRSP with pre-authorized debit arrangement. Every month, a certain amount is taken out of your bank account and deposited into your RRSP or Spousal RRSP. The idea is that you invest every month without having to time the market. Some months, the market is lower and other months, the market is higher.
Choose either annual or monthly contributions depending on how you like to budget your money. Monthly contributions involve no ‘remembering’ to do it. You will be surprised at how quickly your RRSP grows!
GICs, Equities, Mutual Funds or all of the above?
What risk tolerance do you have? Can you sleep at night if the markets rise and fall? Complete a risk profile to give you guidance where to invest your RRSP.
Your personal risk profile depends on your age, assets, goals, ability to handle fluctuations, etc.
Before investing, complete this profile with your advisor or financial institution. It is recommended to redo this profile every five years or if there has been a big change in your situation. Your risk tolerance and investment selection may change over time.
Now is the time to start or contribute to your RRSP. There is a deadline – if you contribute to your RRSP before March 1 2021, you can make this contribution tax deductible in 2020.
At this point, you can also be contributing for your 2021 RRSP. You are taking advantage of more benefits that RRSPs offer.
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