Retirement Plan For Tax-advantaged Savings
There are two amazing tax-saving tools provided by the government for Canadians planning their retirement:
- RRSP : Registered Retirement Savings Plan
- TFSA : Tax-Free Savings Account
- Segregated Fund Investments
RRSP and TFSA are both a savings plan for your retirement that gives you a tax break, allowing you to use all your savings as you need. Where RRSP was an existing traditional option, TFSA is a new introduction by the Government of Canada, having its own unique advantages.
Both RRSP and TFSA offer tax benefits on your retirement funds and enable you to grow your money over time by investing in various assets like stocks, bonds, ETFs, and other available options. While both are effective retirement plans, they have some important distinctions that can make one of them more suited for some of your goals and income levels than the other, depending on how you choose to save. However, there is no restriction, and you can choose to include either a TFSA or an RRSP, or both.
Letâs understand both individually with the unique essential factors to consider while deciding which option is best for you.
Registered Retirement Savings Plan (RRSP)
RRSP is a type of retirement savings account that was created by the Government of Canada in 1957 to assist Canadians in saving for their retirement. The major advantage of an RRSP is that taxation on contributions is withheld until retirement.
Key Factors:
- An RRSP is generally used by people who wish to save for their Retirement.
- You need to be employed or have a source of income to be eligible for an RRSP account.
- RRSP gives you a benefit of tax-deductible contributions, where the amount of money you invest in your RRSP is deducted from the total of your taxable income.
- There is a limit on the contributions you can make to your RRSP, depending on your total annual income. You can contribute 18% of your total earned income or $27,830 for the year 2021, whichever is less. The maximum contribution that you can make to your RRSP differs from year to year.
- The withdrawal from an RRSP is taxable, involving certain exceptions.
- Your RRSP matures at the end of the year you turn 71 years old.