How RRSPs Turbocharge Your Retirement Savings

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By iA Private Wealth, February 12, 2020

To get the most out of your RRSP, it’s important to understand how it works. An RRSP on its own doesn’t constitute a retirement plan. Think of an RRSP as a special type of savings account that offers tax advantages to help you save for retirement.

Any money you put into an RRSP reduces your taxable income for that year. This is why many Canadians who contribute to their RRSP look forward to receiving a tax refund in the spring. The tax you would have paid on that income gets deferred until you retire. RRSPs are particularly useful when you’re in your peak earning years and anticipate being in a higher tax bracket today than when you’re retired and no longer working.

While you may see the immediate refund on your tax bill, that’s not the only tax benefit an RRSP offers. Your RRSP also provides a tax-free way to grow your savings until you need to withdraw the money and convert it to a Registered Retirement Income Fund (RRIF) by age 71. As mentioned earlier, your RRSP is simply an account; it’s how you decide to invest within that account that matters. RRSPs can hold a variety of investment vehicles, including stocks, bonds, mutual funds, exchange-traded funds and GICs. How you invest will depend on your goals and risk tolerance. Any investments you hold in your RRSP can grow and take advantage of the potential for tax-free compounding.

Maintaining a well-diversified portfolio can help you mitigate risk and volatility, and ultimately help you achieve your retirement goals. The mix of investments that make the most sense for you will depend on a variety of factors, such as your ability to save, your risk tolerance and your goals. Depending on those factors, two people of similar ages and incomes could have very different portfolios. An Investment Advisor can help you decide on the right asset mix and develop strategies to help you save for retirement and your other goals.

Key features of RRSPs

  • Generally used for retirement savings.
  • Annual contribution limit of 18% of your previous year’s income to a maximum of $26,500 for the 2019 tax year, minus applicable pension adjustments, plus any unused contribution room from previous years.
  • Contributions are deductible from income.
  • Investments grow tax-deferred (tax is paid when the funds are withdrawn).

RRSPs work well when they’re used for their intended purpose – retirement. With a few notable exceptions, making early withdrawals from your RRSP can result in a hefty tax bill. If you need to save for shorter-term priorities like a kitchen renovation or a new car, consider alternative savings vehicles that don’t impact your retirement nest egg, such as a Tax-Free Savings Account (TFSA).

Typically, one in four Canadians contributes to their RRSP each year, making a median contribution of $3,030.1 Even small amounts can help. Setting up a regular contribution and investment plan will take the stress off the tax deadline and set you on the path to a comfortable retirement. To find out how you can optimize your retirement savings strategy, speak with one of our Investment Advisors today.

1https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1110004401

This article is a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.

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By iA Private Wealth, November 09, 2020 November is Financial Literacy Month. You may hear about events and program launches designed to increase the financial capabilities of Canadians. But really, why focus just one month on enhancing financial literacy? Being able to manage your money is a skill everyone needs every day – whether you are young, old or in between. Typically, people learn the most about money when a big life change happens. It’s usually those big events that turn into teachable moments as people are forced by the situation to learn about their options, choices and decisions to be made. For those of us with young adult children – university students or those just starting out in their careers – the pandemic has been an incredible teachable moment when it comes to finances, with unexpected impacts to both sides of the balance sheet. Money in and money out. For example, students have had to move to online learning, which in most cases has resulted in modest savings. On the other hand, many have unexpectedly lost their jobs or had their income reduced. Others have moved home – or stayed home instead of going off to university or college. And, of course, many adults with young children have assumed the role of caretaker while working from home versus depending on daycare. We believe financial literacy month should be every month, but why not take the opportunity this official “Financial Literacy Month” to discuss with your adult children some key financial lessons learned through this pandemic. There are surely many takeaways that will help them better prepare for future disruptions to their financial lives and potentially reduce financial anxiety going forward. Here are three questions to discuss: Do you have a budget? Those that do have a budget have likely seen lots of changes. Income may have decreased. Or, working from home may have actually saved them money in a number of ways: daycare costs, transportation, eating out, clothing. Living through this experience of spending less should be a lesson to all Canadians about needs as opposed to wants and how to better control spending. Do you have an emergency fund or emergency savings? This pandemic has certainly hit home how important it is to have some money put away for a rainy day. Any savings your children have should be channeled into an emergency fund if they haven’t got one. Do you have the appropriate investments to help you meet your goals? Many people second guessed their risk tolerance levels when the markets crashed in March. Young people who are just starting to experience investing may shy away from the markets due to the volatility. But, as what typically happens in market crashes, there was a rebound. Young investors are in a great position now to take advantage of market growth over the long term. Bottom line, now is a great time to talk to your children about money. Introduce them to your investment advisor who can walk them through the ins and outs of money management and investing. While money can’t buy happiness, being in control of your finances can certainly lead to less stress and less anxiety about money. Learn more about how you and your family can get the most out of Financial Literacy Month by contacting one of our Investment Advisors today.
Is a TFSA for You?

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By iA Private Wealth, February 18, 2020 Do you know the difference between a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP)? Don’t be embarrassed if you don’t know the answer. More than a quarter of Canadians (27%) are unable to explain the difference between the two accounts1. While RRSPs and TFSAs share similarities, it’s important to understand how these accounts work and when to use one over another. Turbocharge your savings As the name implies, an RRSP is typically reserved for retirement savings (click here for more details). If you are looking for a way to grow your savings tax-free, but would like more flexibility to access your money, consider a TFSA. Like an RRSP, a TFSA allows you to invest in a wide variety of products, including stocks, bonds, mutual funds, exchange-traded funds and GICs. The right mix of investments will depend on your goals. A TFSA can be a great way to save for shorter-term goals, such as a home reno, a new car or building your “rainy day” fund. Before deciding on which investments to hold in a TFSA, consider your time horizon and savings goal, among other factors. Saving for retirement If you’re in your peak earning years, an RRSP may be a better long-term retirement vehicle compared to a TFSA. You can deduct RRSP contributions from your income to lower your tax bill, something you can’t do with a TFSA. An RRSP also helps you save by deferring taxes into the future to when you’re retired, at which point you’ll likely be in a lower tax bracket. Although RRSPs offer a good way to save for retirement, TFSAs can play a role, too. A TFSA can provide a tax-free way to supplement your income in retirement, which can be useful if you’ve reached your RRSP contribution limit or have a reliable defined benefit pension plan through your employer. Key features of TFSAs Can be used to fund any goal. For the 2020 tax year, the contribution limit is $6,000; the total cumulative contribution room is $69,500 for those who have never contributed and have been eligible for the TFSA since its introduction in 2009. Contributions are not tax-deductible. Investments benefit from tax-free growth, with no tax on withdrawals. This year, resolve to save TFSAs and RRSPs are both attractive for savers and offer significant benefits in helping you reach your financial goals. If you’re still unsure about the best approach for your situation and want to learn more about how to optimize your savings strategy in 2020, contact one of our Investment Advisors today. 1https://www.bnnbloomberg.ca/1-in-4-canadians-don-t-know-the-difference-between-a-tfsa-and-an-rrsp-survey-1.1380298
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