Saving Options Abound for Individuals
There’s a new trend in Canada – saving money. In fact, it seems that saving is all the rage. According to TD Waterhouse Chief Portfolio Strategist Robert Gorman, Canadians are now saving 6 percent to 8 percent of their annual incomes, which is an enormous change from years past. In 2008, before the economic downturn, the savings rate was near zero.
Are you one of the trendy people socking away your cash? If so, congratulations. Saving is an important step on the path to financial security.
If you are not saving — or not saving all that you could — there are many options available:
Tax Free Savings Account (TFSA). Canadian residents age 18 or older can contribute up to $5,000 per year to a TFSA. While contributions are not tax deductible, all earnings and withdrawals are tax-free, and unused TFSA contribution amounts can be carried forward into future years. Neither income earned within a TFSA nor withdrawals from a TFSA affect eligibility for federal income-tested benefits and credits.
Also, funds can be given to a spouse or common-law partner to invest in a TFSA, and TFSA assets can be transferred to a spouse or common-law partner when the original account holder dies.
Registered Retirement Savings Plan (RRSP). RRSPs are investment accounts with special tax benefits, designed for retirement savings. Using an RRSP, individuals with earned income can save the lesser of 18 percent of their earned income or $22,970. RRSPs are intended as long-term investment vehicles, and must be converted to a form of retirement income, such as a Registered Retirement Income Fund (RRIF) by the end of the calendar year in which you turn 71. With RRSPs, contributions are tax deductible, but funds are taxable as you draw them out.
If you haven’t contributed the maximum allowed amount to your RRSP in any given year, you are permitted to carry forward unused contribution amounts into future years. The deadline for RRSP contributions is 60 days after year-end.
Individual Pension Plan (IPP). Business owners can create an IPP, a defined benefit plan often referred to as an RRSP “upgrade.” IPPs are creditor-proof plans set up by the company, with contributions made by the company on behalf of designated employees.
IPP limits are calculated for each individual participant, according to an actuarial formula based on salary and years of service. They generally allow business owners to put away substantially more money than is allowed in an RRSP. Ideal candidates for an IPP earn at least $100,000 per year of T4 income and are between ages 40 and 70.
There are more than 20,000 IPPs in Canada now, and they are growing in popularity because of their flexibility and high contribution limits.
Retirement Compensation Account (RCA). RCAs are another form of savings set up by a company for owners or key employees. Contributions are tax-deductible to the corporation and taxes are paid at the time the RCA is established. RCAs tend to be popular with individuals with very high earnings since they provide a way to deduct income during high-earning years. There are no annual limits, but half of the RCA contribution has to be put into a tax account with Canada Revenue.
Of course all of these savings options have their strengths and weaknesses, and should be chosen based on your individual circumstances. Some of the more sophisticated plans also have substantial fees associated with them.
But, it’s never too late to start saving —and the earlier you begin, the more you’ll have to fund your future.
Are you taking advantage of all of your retirement planning opportunities? Contact us to discuss your options.