A retirement savings plan is a way of protecting your post-retirement financial lifestyle. However, in recent times, recessions, stock-market declines, housing market bubbles, joblessness, and a global pandemic have created a series of challenges for people trying to start, grow, or maintain a retirement savings plan. With all these economic uncertainties, it’s natural to wonder if you’re doing all you can to protect your retirement nest egg. Taking a back to basics approach can instruct you on how to keep your retirement financial plan on track during uncertain economic times and beyond.
The question of reducing debt or contributing to savings will continue to be debated for as long as people plan to retire in Canada.
Of course opting for both: reducing debt and increasing savings is the ideal. As for which is better, however, really depends on the individuals involved, their goals and feelings, and their unique financial situations.
If you find you just can’t decide whether to save or pay off, start by contributing to a TFSA; those deposits can easily be withdrawn and applied to your mortgage in the future.
We all know the cost of goods and services rises over time. Single postage stamps that cost 85 cents just 3 years ago now cost a dollar. The same thing has happened to virtually everything we purchase. This is what we call “inflation” – a sustained rise in the cost of goods and services over time. It also means that the purchasing power of a dollar decreases over time because you need more and more dollars to buy the exact same goods or services. This has important implications for your savings; especially in your retirement years.
Capital Gains tax occurs when you sell capital property for more than you paid for it. In Canada, you are only taxed on 50% of your capital gain. For example, if you bought an investment for $25,000 and sold it for $75,000 you would have a capital gain of $50,000. You would then be taxed on 50% of the gain. In this instance, you would pay tax on $25,000. In Canada, there are some legitimate ways to avoid paying this tax: Tax shelters, Lifetime Capital Gains Exemption, Capital Losses, Deferring, and Charitable Giving.
Ever feel like your money is not going as far as it used to? Do not worry, you are not imagining it. You can blame inflation. Inflation is the rising price of goods and services over time. This rise impacts your purchasing power. Though it can be discouraging to think that inflation is eating away at the value of your assets, economists consider a small amount of inflation indicative of a healthy economy. Inflation encourages consumer spending and corporate productivity.
If you are nearing retirement, you may be starting to think about creating retirement income for yourself from your RRSPs. Registered Retirement Savings Plans (RRSPs) are considered accumulation vehicles. This means they are used to save for your retirement in a tax efficient way. When the time comes to start using your hard-earned savings to fund your retirement, you may want to consider moving them to a payout vehicle called a Registered Retirement Income Fund (RRIF).
The amount deposited into a Tax Free Savings Account (TFSA) is subject to a yearly contribution limit. For 2020, and again in 2021, the annual limit has been set at $6,000. As of 2021 the lifetime maximum contribution has grown to $75,500.
If an over-contribution is made Canada Revenue Agency will levy penalties.
If you have been a good saver and contributed religiously to your RRSP, you should be rewarded with a sizeable six or seven figure RRSP that would make your retirement that much more enjoyable. The only issue now is – how do you get the money out of the RRSP without paying more tax than you should? Typically, it is advised that investors leave their RRSPs alone for as long as possible to take advantage of the tax-free growth. While this can be true for many people, it is important to crunch the numbers before you retire to make sure this makes the most sense for your unique retirement situation. Many retirees, especially those with a high net worth, may find there could be a more efficient way to withdraw retirement income.
Whether you should invest in a Tax Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP) is a question that affects almost every investor. For most, the answer is “a bit of both.”
If you have a looming short or medium-term need (under five years), the untaxed TFSA withdrawals are likely the right choice. For longer term retirement needs, you’ll want to invest in an RRSP.
With a new year comes new tax numbers! Below is a quick reference of important tax numbers for three years, including 2021. CRA has utilized a 1% indexing (inflation) for those numbers subject to that condition.