What You Did Not Know About Retirement and Were Afraid to Ask

When Do You Start Planning for Retirement?

It is best to start this process the day you commence earning a living. This could be even before you marry or enter into a permanent relationship. Start with your first pay cheque.

Under Canadian Tax Law, you can contribute into an RRSP based upon your prior year’s earnings, an amount of 18% of said earnings.

Any portion not contributed can be carried forward and utilized at any time in the future.

At the present time the maximum contribution per taxpayer is $22,000 which is achieved at an income level of $122,000. The monies contributed can be invested in many different types of investments and your investment advisor can assist you.

There is another tax saving contribution that should be made as soon as a taxpayer turns 18 years of age and that is a Tax-free Savings Account (TFSA). There is a maximum annual contribution of $5,000 indexed to inflation that anyone can make so long as they are of age and file a tax return. The rules for investment are similar to those for an RRSP but the difference is that the amounts contributed to a TFSA are non-deductible for tax purposes but the receipt of the proceeds are also non-taxable. Any year in which a contribution is not made in full is carried forward.

It is prudent to begin contributing to a TFSA between the ages of 18 and 30 which would be the low earning years. Contribute to an RRSP for the years 30 to 70 and then begin drawing in your RIIF.

For the years between 30 and 70 you can still contribute to your TFSA or forgo same and contribute larger amounts when you attain the age of 71, using the built-up accumulation of the 40 years of short or non-contributed funds.

There are numerous rules pertaining to both RRSP and TFSA which should be discussed with your financial advisor.

Let me give you an example of how to use your TFSA. Suppose you have a stock which you purchased many years ago and has fallen sharply in value but which you still own. You learn that somehow this investment is going to bloom in the near future, 1 to 2 years. Determine the present market value of your holdings and transfer said holdings into your TFSA Account (be sure to register the new owner with the broker). When the investment begins to bloom you may cash same or remove the proceeds without any tax consequences - TAX FREE.

I briefly mentioned a RIIF which is the successor to an RRSP at age 71. Here you have the option of withdrawal of all or part of the moneys at age 71 but you must receive a pre-determined percentage of the funds each year up to and including age 90. RIIF funds are generally invested in the same investment vehicles as an RRSP.

Just a brief statistic:  Only 1/3 of all Canadians have an RRSP plan and 62% have no Pension Plan at all.