It’s Always RRSP Season

Investment advice today is plentiful, sometimes free – and often confusing. That’s because everyone’s circumstances and retirement goals are different: there are guides, not rules. But there is one constant: it’s never too early – or too late – to start planning for retirement.

You may also be wondering if you should be using a RRSP or TFSA. Well here is the breakdown for you…with an RRSP, or Registered Retirement Savings Plans, you’ll get a tax break when you contribute and when the money is withdrawn, you’re taxed. It is the opposite for the TFSA, or Tax-Free Savings Account, there is no tax break up front, but when your investment income is withdrawn, including any capital gains earned, your TFSA is not taxed.

So which is better for you? If you are earning less than $36,000 you should be investing in a TFSA. When your income is lower and you are in a lower tax bracket, it is better for your money to be taxed before it is put in your retirement savings, as the case with a TFSA. Also, when you retire, the money you take from your TFSAs isn’t considered income, so it won’t result in clawbacks to Old Age Security and the Guaranteed Income Supplement.

A good idea if your just starting your career and earning in the $30,000 range, could be to start with a TFSA and when your income goes up, you could switch to RRSPs. Not only will you get larger tax breaks, but you’ll have built up lots of extra RRSP contribution room from the years you were contributing to your TFSA instead. Another route that many people may not realize is that you have a choice as to when you actually claim your RRSP contributions. You don’t have to do it the same year that you actually made the contribution. If you expect your income will go up the next year, you can make the contribution but then waiting until the second year to actually claim it. This way you would get a greater tax break from your contribution because you are claiming it in a year when your income is higher.

There are differing opinions on how much you will need when you retire, the industry standard is 70% of your income – so if your household income is $100,000 a year, your pensions and investments need to provide $70,000 a year. You may not need as much and there are many others who believe that you only need half of your regular income a year. Just remember your retirement is in your hands, and nothing beats the advice of an expert, who will go over your goals and situation and help you get where you want to go.

As a general rule, the closer you are to retirement, the safer your portfolio should be. When you’re in your 20s, 30s and 40s, it may be fine to have up to 60% of your money in equities, because if the stock market goes down, there’s time to recover. But in your 50s and 60s, one bad year in the market can do serious harm.