2021 RRSP Limit Rises to $27,830

The Canadian Income Tax Act limits the amount individuals can contribute to an RRSP. Every year you receive new RRSP contribution room equal to 18% of your previous year’s earned income, subject to a dollar limit (RRSP limit), reduced by your Pension Adjustment.

The limits and other increases for recent years up to the current year are summarized in the chart below:

For more information and the most up-to-date limits, visit the Canada Revenue Agency website.

Retirement Planning FAQ

In this FAQ, we answer the most common questions asked about retirement planning. If you have any specific questions, send us an email and we would be pleased to help.

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Why prepare a Retirement Analysis today if I am not retiring for many years?

Planning for retirement requires a long-term commitment that should not be delayed. One of the most important aspects of the financial planning process is preparing for a secure retirement. The decisions you make today will have a huge impact on your lifestyle in retirement. We can help you determine how much you will get from your company pension and the government when you retire, and how to make up the difference with your own customized investment plan

How much will I receive from Canada Pension Plan (CPP)?

The Canada Pension Plan is Canada’s government and user-financed pension plan. Every working Canadian contributes to the plan – either by payroll deductions at work or, for those who are self-employed, directly via the Canada Revenue Agency. The amount you may be entitled to depends on a number of criteria. Click below to find out more about CPP and the maximum benefits available to you.

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How much will I receive from Old Age Security (OAS)?

Old Age Security (OAS) is a universal, federal benefit provided to retired Canadians aged 65 and older.

Click below to find out more about OAS and the maximum benefits to you.

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What Is a Pension Adjustment Reversal (PAR)?

You may have additional contribution room arising from a Pension Adjustment Reversal (PAR). The purpose of the PAR is to restore RRSP contribution room that was previously lost from Pension Adjustments (PAs).

A PAR arises where the termination benefit from a Registered Pension Plan (RPP) or Deferred Profit Sharing Plan (DPSP) is less than the total PAs attributed to benefits accrued under the plan. This may happen either if you were a member of a defined benefit pension plan or if you’ve lost unvested benefits under any RPP or DPSP.

If applicable, PARs will be added to your contribution room for the year of termination.

How would I receive a Past Service Pension Adjustment?

A PSPA may arise if:

1. Your pension benefits under your employer’s registered pension plan are retroactively upgraded to provide better benefits
2. You transfer benefits to another pension plan involving the purchase of additional benefits relating to past service

What is a Defined Benefit Pension Plan?

A plan that specifies the pension to be provided on retirement (usually based on number of years of service, average earnings, etc.). If a plan is contributory, the rate of employee contributions may be specified, with the employer paying the balance of the cost.

What is a Defined Contribution Pension (Money Purchase) Plan?

A plan that specifies contributions to be made by the employer and possibly the employee, but does not guarantee the amount of pension benefits that the employee will receive. This amount depends on accumulated contributions and earnings in the pension plan.

RRIF FAQ

In this FAQ, we answer the most common questions asked about registered retirement income funds (RRIFS). If you have any specific questions, send us an email and we would be pleased to help.

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What type of investments can I have with an RRIF?

An RRIF provides the same investment options (including GICs, bonds, stocks and mutual funds) as an RRSP. Inside your RRIF, your assets continue to grow tax-deferred until you withdraw them. You maintain control over how your savings are invested and can make transactions and rebalance your portfolio according to changing market conditions and your personal needs.

How much do I have to withdraw each year from my RRIF?

A minimum amount must be withdrawn each year based on a set formula that takes into consideration your age (or the age of your spouse) and the market value of the assets in the plan as at December 31st of each year.

When must I convert my RRSP to an RRIF?

An RRIF can be opened at any age, but new contributions can never be made into the account at that point. Keep in mind that you must convert your RRSP into a RRIF no later than age 71.

What happens to my RRIF account upon death?

RRIFs are quite flexible from an estate-planning point of view. You can have your RRIF make payments to your surviving spouse after your death by making him or her your successor annuitant. Or you can name a beneficiary who will receive the remainder of your funds as a lump sum. If you don’t have a beneficiary, your RRIF will revert to your estate.

LIF FAQ

In this FAQ, we answer the most common questions asked about Life Income Funds (LIFs). If you have any specific questions, send us an email and we would be pleased to help.

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Have there been any major changes with Locked-In RRSPs?

Until recently, the big drawback of locked-in RRSPs was that, on maturity, your only option was to use the funds to purchase a life annuity. If this wasn’t an appropriate vehicle for you, or if you simply wanted to have more control over your money, you were out of luck.

To address this problem, most provinces introduced Life Income Funds (LIFs). You can use your locked-in RRSP or LIRA funds to establish a LIF.

You may also be able to do this using your pension funds, if allowed by the rules of your particular plan.

What are the benefits of a Locked-In RRSP account?

A Life Income Fund, or LIF, is an appealing retirement income alternative for people who are liquidating their locked-in registered pension plans or locked-in retirement accounts. It provides greater flexibility and investment options than an annuity.

What is the difference between a LIF and an RRIF?

A LIF works like the more familiar Registered Retirement Income Fund (RRIF), but it must be used to purchase a life annuity by the time you are 80, except in Quebec. Until that time, a LIF allows you to invest in a wide range of instruments, and it shelters the income from tax until you withdraw it.

With a LIF, you also have some control over the timing and level of your withdrawals. Additionally, LIFs provide the same estate-planning flexibility as RRIFs. You can transfer the benefits to your spouse, name a beneficiary who will receive the remaining funds in a lump sum payment, or roll the LIF into your estate.

When must I start taking income from a LIF?

You must start taking an income from your LIF one year after you open the plan. From then on, until you turn 80, you can customize the amount and timing of your annual withdrawals as long as you stay within the minimum limits set by the Canada Revenue Agency.

Those minimums are the same as the minimum withdrawal requirements for an RRIF. Unlike with an RRIF, however, you cannot use your spouse’s age to determine your withdrawal schedule. There are also maximums set on the amount you can take out each year.

The maximum amounts are arrived at by calculating what you would receive if you used the funds in your LIF to buy an annuity to age 90. Because interest rates and annuity factors change from year to year, so will the maximums. There are some eligibility restrictions on LIFs. You can’t open one until you are within 10 years of the normal retirement age stipulated by your RPP, which usually means you must be 55.

And the deadline for starting a plan is December 31 of the year you turn 71.

Diversify for Growth

One of the best ways to increase the growth potential of your portfolio over the long term is to put your money into several different types of investment options. This is known as diversification. Proper diversification can help you increase the overall returns and at the same time reduce the risk of your portfolio.

To determine how best to diversify, it helps to understand the basics about fixed-income investments and investments with growth potential. As well, you might want to consider investments that offer liquidity or the flexibility to change your investments.

Choosing the right mix of investments for your needs starts with an assessment that helps determine who you are as an investor. By knowing your investor profile, we can match you up with a diversified portfolio of financial products that could help maximize the return on your portfolio while maintaining a risk level that is appropriate for you.

We can help you build a better portfolio!

Converting your RRSP to a RRIF

Registered Retirement Income Funds, or RRIFs, are a very popular choice for people who have to wind down their RRSPs. Their flexibility makes them an attractive alternative to annuities – especially if interest rates happen to be low.

A RRIF provides you with the same investment options your RRSP did, including GICs, bonds, stocks and mutual funds. Inside your RRIF, your assets continue to grow tax-deferred until you withdraw them.

You maintain control over how your savings are invested and can make transactions and rebalance your portfolio according to changing market conditions and your personal needs.

Converting your Locked-In RRSP

Like many Canadians, you may have some of your retirement funds tied up in a locked-in RRSP or locked-in retirement account (LIRA). This has become a popular choice for those who leave a company where they have earned the right to keep their accumulated pension benefits (known as vesting).

Your other options may include transferring your funds to your new employer’s plan or leaving the funds with your former employer’s pension plan. A locked-in RRSP is very much like a regular RRSP. The major difference is that a locked-in RRSP falls under the pension-fund rules, which prevent you from turning your pension into hard, spendable cash. Specifically, if you move your pension benefits into an RRSP account, the money becomes locked-in.

You are prevented from withdrawing any funds – or collapsing the plan – until you reach a certain age, usually age 55.

Beyond their names, the only significant difference between a locked-in RRSP and a LIRA is the controls imposed on them by provincial regulators. The term locked-in RRSP is used in Ontario, British Columbia, Nova Scotia and Newfoundland, while the other provinces use the term locked-in retirement accounts.

RRIFs vs RRSPs – What’s the Difference?

The major difference between the two savings vehicles is that you can’t contribute to an RRIF as you do to your RRSP. Instead, an RRIF requires you to withdraw a minimum amount each year.

You must start withdrawing payments from your RRIF the year after you open it.

The Rules Governing Withdrawals

Each year, you can withdraw as much as you want. The other side of the coin is that, each year, you must withdraw at least the annual minimum required by Canada Revenue Agency (CRA). The benefit of an RRIF is you have the flexibility to access extra funds if and when you need them.

The minimum withdrawal levels are based on your age. However, when you open an RRIF, you can choose at that time to have your withdrawals based on your spouse’s age. Since minimum withdrawals increase as you get older, using a younger spouse’s age to set the level can be a good idea. This will permit you to take smaller amounts out of your RRIF each year, thus deferring income tax on your retirement savings as long as possible.

Until recently, you had to wind down your RRIF by the end of the year that you turned 90. Now CRA allows you to maintain your RRIF indefinitely.

You must, however, start withdrawing 20% of your remaining funds each year once you hit age 94 (or, alternatively, when your spouse does).

RRIFs vs. Annuities – Which Should I Choose

There are four basic features that tip the scales in favour of RRIFs over annuities for most people:

1. You Keep Control

If you buy an annuity, you hand over your money to an institution, generally an insurance company, which invests it and pays out a set amount to you. With an RRIF, however, you maintain control over your money. You can invest it as you see fit in a style that you’re comfortable with – and that will meet your needs and goals.

2. Customizable Cash Flow

An annuity provides you with fixed regular payments based on interest rates at the time you make your purchase. An RRIF, by contrast, gives you more flexibility. As long as you take out the minimum amount required each year, you are free to decide how much you withdraw thereafter. That means you have a pool of capital you can easily tap, whether for special purchases, like an around-the-world cruise or to meet unexpected costs, like an unexpected medical bill.

3. Enhanced Returns

Because an annuity guarantees you a set level of payments, the sum you receive will often be determined by the current interest rate environment. An RRIF can provide serviable income and investment options rates.

4. More Purchasing Power

A RRIF may help in the battle against inflation. Because you decide how much to withdraw each year, it’s a simple process to increase your income if and when inflation strikes. And because you can select your investments, you can actually take advantage of rising rates with the flexibility to shift your money into higher-yielding investments.

Consider Using Annuities and RRIFs Together

To get the best of both worlds – income predictability plus withdrawal flexibility and investment options – consider purchasing a life annuity with some of the proceeds from your RRSP. Then put the rest into an RRIF or a life income fund (LIF), if your funds come from an RPP. The annuity could provide you with a dependable income stream, while the money in your RRIF provides flexible investment options.

RRSP Literacy Quiz

Answers to the questions published in the Q4 2020 issue of GP Wealth Guide.

Question 1: The contributions you make to your RRSP are tax-deductible.

Answer: TRUE

Details
You get a tax deduction for the amounts contributed (up to certain limits). In other words, you can effectively set aside a part of your income each year to save for retirement on a pre-tax basis.

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Question 2: The investments held in an RRSP are allowed to grow without being taxed.

Answer: TRUE

Details
RRSPs offer tax-sheltered growth. The money you make on your RRSP investments is not taxed as long as it stays in the plan. Tax-sheltered growth coupled with compounding means your investments grow much faster than investments held in a non-registered account.

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Question 3: The minimum age for contributing to an RRSP is 18.

Answer: FALSE

Details
With RRSPs, there’s no minimum age. As long as a Canadian has employment income and files a tax return, they (or their guardian) may set up and contribute to an RRSP.

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Question 4: Once you open an RRSP, you can keep it for the rest of your life.

Answer: FALSE

Details

By the last day of the year you turn 71, you must close your Registered Retirement Savings Plan (RRSP) and choose one of three options;

1. Cash out the account and pay income tax on the whole amount
2. Convert the investment to an annuity
3. “Rollover” the investments in your RRSP into a Registered Retirement Income Fund (RRIF)

The latter two options safeguard your investment from taxation until you receive distributions, but there are key differences between them, and you should consider these options carefully before moving forward.

Also, after age 71, if you continue to have earned income, you can contribute to a Spousal RRSP up until December 31 of the year your spouse turns 71.

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Question 5: You can transfer unused RESP money to your RRSP.

Answer: TRUE

Details
As long as you have RRSP contribution room available, you can transfer up to $50,000 of income earned in an RESP to an RRSP, either yours or your spouse’s.

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Question 6: You don’t need to have filed an income tax return to open an RRSP.

Answer: FALSE

Details
You must have earned income in the previous tax year and reported it to the CRA on your tax return.

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Question 7: You can have both a spousal and non-spousal RRSP plan.

Answer: TRUE

Details
If you earn more money than your spouse, you can open a Spousal RRSP. This will help you even out any gap in income between the two of you during retirement while allowing you a tax break right now.

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Question 8: If you don’t contribute the maximum to your RRSP this year, you can carry forward your contribution room only into next year.

Answer: FALSE

Details
Unused contribution room can be carried forward to use in any future year. (However, keep in you that you cannot contribute to an RRSP for a person (yourself or your spouse) who already turned age 71 in the previous year.)

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Question 9: When you borrow from your RRSP to buy your first home or pay for education, you don’t pay tax on the loan as long as the repayments are properly made.

Answer: TRUE

Details
With the Home Buyers’ Plan repayment rules you will not have to pay income tax on the money you withdraw from your RRSP as long as you replace it within 15 years. The repayment period begins two years after the year in which the withdrawal is made.

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With the Lifelong Learning Plan repayment rules you will not have to pay income tax on the money you withdraw from your RRSP as long as you replace it within 10 years. The repayment period begins no later than the fifth year after your first LLP withdrawal or the second year after you can no longer claim the educational tax credit for three consecutive months.

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When is the right time to take CPP?

So, you’re wondering when you should start CPP. Like many aspects of retirement planning, there isn’t a one-size-fits-all answer.

You’ll receive the full CPP benefit if you start at age 65. However, you can begin as early as age 60 or as late as age 70.

At first glance, starting CPP early may seem appealing. However, the earlier you start, the smaller your monthly amount. Conversely, if you start later, your monthly amount will be larger.

The precise CPP payment calculation is as follows:

• If you start before age 65, payments are lower by 0.6% per month (or 7.2% per year), up to a maximum reduction of 36% if you start at age 60.
• If you start after age 65, payments are higher by 0.7% per month (or 8.4% per year), up to a maximum increase of 42% if you start at age 70 (or later).

Although taking CPP early means you’ll receive a lower monthly benefit, there are cases where doing so makes sense, such as avoiding future OAS clawbacks or having a reduced life expectancy.

Similarly, there are cases when it makes sense to delay starting CPP, such as to avoid being thrust into a higher tax bracket (CPP is taxable income).

With each step towards retirement, you can adjust your plan to reach your goal. Looking for more ideas to help you plan your retirement? We encourage you to talk to us.

Do you know why it pays to have an RRSP?

One of the best ways to save for retirement is through a Registered Retirement Savings Plan (RRSP). If you don’t have an RRSP, you’re missing a golden opportunity to build wealth and secure your financial future.

Here are five compelling reasons why you should open an RRSP and contribute to it regularly:

1) Building your retirement nest egg

You want to have enough money saved to support your desired lifestyle in retirement. An RRSP is especially important if you don’t have a company pension or if the payments are not enough to meet your needs.

2) Tax-Deferred Earnings

When you put money into an RRSP, you immediately pay less income tax. That’s because the contribution comes out of your annual earnings before tax gets deducted. For many people, their income tax rate will be lower at retirement, so they’ll pay less tax on withdrawal of the money.

3) Savings Grow Tax-Free

You won’t pay any tax on investment earnings as long as they stay in your RRSP. This tax-free compounding allows your savings to grow faster.

4) Flexibility

RRSPs can hold various qualifying securities, including mutual funds, stocks, and guaranteed investment certificates (GIC). This allows you to choose the investments that best suit your personal risk profile and investment objectives.

5) Spousal RRSPs

If you earn more money than your spouse, you can open a Spousal RRSP. This will help you even out any gap in income between the two of you during retirement while allowing you a tax break right now.

With each step towards retirement, you can adjust your plan to reach your goal. Looking for more ideas to help you plan your retirement? We encourage you to talk to us.

RRSP vs. TFSA: Which Is Better for You?

Many people are uncertain whether to choose a Registered Retirement Savings Plan (RRSP), a Tax-Free

Savings Account (TFSA) or a combo of both to save for the future.

Regardless of what you decide, one of the best things you can do is save consistently. I recommend setting up a pre-authorized contribution plan and putting a portion of your income aside each month.

Eventually, you can increase your contributions with a goal to max out both accounts.

Tax advantages

Both the RRSP and the TFSA offer tax advantages that can help accelerate retirement savings. Still, you may find one option more suitable, depending on your circumstances.

In general, lower-income earners (under $45,000) will benefit more from a TFSA. While not specifically designed for retirement savings, TFSAs can be used for this purpose and make an excellent complement to an RRSP.

If you’re saving for retirement, an RRSP is a great choice. With an RRSP, you defer paying tax from your peak earning years to retirement, when your income and tax liabilities may be lower.

Which is best?

Determining which is best for you requires a complete review of your personal circumstances. Ultimately, it would be best if you aimed to have both an RRSP and a TFSA, spreading your savings across both accounts.

With each step towards retirement, you can adjust your plan to reach your goal. Looking for more ideas to help you plan your retirement? We encourage you to talk to us.

Ten Tips for Maximizing your RRSP Savings

Here are 10 ideas to help you keep your retirement plans on track. By making the right investment decisions now, you could enjoy the benefits for decades to come.

1. Start early, beginning with small contributions if you have to
2. Pay yourself first – that is to say, make it a habit to always invest a portion of your paycheque into your savings and retirement nest egg
3. Maximize your contributions to get the most benefit from your RRSP’s tax-deferred compound growth
4. If you have extra funds, consider maximizing your RRSP contributions first before accelerating your mortgage payments
5. Consider borrowing to make your contribution
6. Roll over your retiring allowance into your RRSP
7. Naming a beneficiary may save your estate probate fees and could provide tax advantages
8. Calculate how much you’ll need in retirement
9. If you have a spouse, explore the potential benefits of spousal RRSPs and income splitting
10. Take advantage of the Home Buyers’ Plan (HBP) and the Lifelong Learning Plan (LLP)?

Now’s the time to put your retirement savings plan into motion. If you have any questions, we’d be pleased to answer them.

Start Early with RRSP Savings

The sooner you start investing in an RRSP, the better off you will be. Why? Because an early start means the income earned in your RRSP has more time to compound. In fact, investors who start earlier can make a smaller total investment in their RRSPs and still be farther ahead than those who make a larger total investment but start later.

No minimum age

And with RRSPs, there’s no minimum age to start investing. As long as a Canadian has employment income and files a tax return, they (or their guardian) may set up and contribute to an RRSP.

Consider the following examples:

Ted, age 45

• Contributes $2,000 a year until age 65*
• Earns 6% average annual compounded return
• Total RRSP investment of $42,000
• Total worth of RRSP at age 65: $84,785

Steve, age 30

• Contributes $1,000 a year until age 65*
• Earns 6% average annual compounded return
• Total RRSP investment of $36,000
• Total worth of RRSP at age 65: $126,268

At age 65, Steve’s RRSP is worth significantly more than Ted’s because Steve’s RRSP had more time to compound.

*Assumes contributions made at the beginning of each year.

Contribute Every Year to Your RRSP

Making smaller contributions every year rather than making larger ones every few years can be more financially beneficial. That’s because your money has more time to compound within the tax-free environment of your RRSP.

Mary, age 30

• contributes $1,000 a year for 35 years*
• earns 6% average annual compounded return
• total RRSP investment: $35,000
• total worth of RRSP at age 65: $118,121

Karen, age 30

• contributes $5,000 every 5 years for 35 years*
• earns 6% average annual compounded return
• total RRSP investment: $35,000
• total worth of RRSP at age 65: $104,771

Mary is ahead by $13,350. Plus she probably found it easier to make her smaller annual RRSP contributions

Use Your Unused Contribution Room

Many people have unused RRSP contribution room, which is the difference between what you actually contributed and your maximum allowable contribution amount. This amount can be carried forward from year to year.

The carry-forward provision came into effect in 1991, so any unused RRSP contribution limits since 1991 can be carried forward to another year. Check your Notice of Assessment from Revenue Canada for your total allowable contributions carried forward and try to put that amount into your RRSP this year.

If you don’t have the money readily available, consider taking out an RRSP loan.

Meeting the Retirement Challenge

Although RRSPs offer significant benefits, how well they work for you will be determined by the quality of advice you receive, both when you set up the plan and in the future. It is therefore vital to get sound advice on all aspects of managing your retirement savings.

A close long-term relationship with a qualified financial advisor will ensure your savings are arranged to satisfy your present and future needs as best as possible. An independent financial advisor can provide services that include:

• Providing a retirement projection to determine how much you must save and invest between now and retirement.
• Select a suitable portfolio of investments, ensuring your retirement savings are soundly diversified and monitor them on an ongoing basis. This should include ensuring that your portfolio has the maximum foreign content allowable.
• Ensure that all paperwork to set up, transfer and make periodic changes to your RRSP is completed quickly and accurately.
• Make adjustments to your registered and non-registered portfolio in response to changes in administrative rules, tax laws, economic conditions and of course, changes in your personal conditions.

Just as importantly, good investment professionals educate their clients about their investments and ensure their clients have access to the best possible service. A financial advisor can help you set realistic personal financial targets.

But remember: based on historical evidence, chances are government and/or company pension plans alone just won’t do the job. So you must commit to a savings plan to supplement these programs in your retirement.

RRSP vs. TFSA: Which Is Right for You?

Wondering whether you should put your money into a Tax-Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP)? You’re not alone. Both plans offer savings benefits, but depending on your circumstances, you may find one more suitable than the other.

For the most part, low-income earners (under $35,000 or so) will benefit more from a TFSA, while high-income earners are likely to do better with an RRSP. For those earning a moderate income, it’s difficult to predict which would be better. The table below shows potential investment outcomes for three 40-year-old investors at different income levels. Someone earning $30,000 and expecting to withdraw $10,000 annually after age 65 risks losing the Guaranteed Income Supplement if he or she uses an RRSP.

A high-income earner may see significant Old Age Security clawbacks from RRIF withdrawals, but would still be better off with an RRSP because the clawbacks would be more than offset by the greater tax savings when contributions are made.

Keep in mind, this illustration only helps you decide which contribution to make with your first $5,500 of after-tax savings. If you can save more and you’re a middle-income earner, you could max out your TFSA and put the rest in your RRSP. And if you’re a high-income earner maxing out your RRSP, you can use a TFSA for additional savings.

The chart below will help you better understand some of the key similarities and differences between the TFSAs and RRSPs.

Determining whether you’d be better off investing in a TFSA or an RRSP requires a complete review of your personal circumstances — and making a final decision is not always easy.

The Power of Compounding

To reap the most benefit from your investments, you need to start saving early. Because the longer your savings stay invested, the more you gain through the power of compound interest.

The magic of compounding is that you earn interest not just on your contributions, but also on all of the accumulating interest, dividends and capital gains. This causes your money to grow faster and faster as the years go by.

The sooner, the better

Here are 3 excellent tips for getting the most out of compounding:

• Don’t delay. The earlier in life you start investing, the more time your savings have to grow.
• Contribute early. By making your investment in January of the current tax year, instead of at the last moment of the next tax year (at the end of RRSP season in late February or early March), you’ll have an extra 14 months of compounding working to your advantage.
• Make regular monthly contributions. If you can’t make a lump-sum contribution early in the current tax year, you can still benefit by making monthly contributions.

The following example illustrates how much your RRSP can earn when you make your total annual contribution at the beginning of the year, at the end of the year and through equal monthly contributions.

For example:

Mark, Sean and Richard each contribute $1,200 annually to their RRSPs earning a 6% average annual compounded return.

• Mark contributes his $1,200 at the beginning of each year.
• Sean contributes $100 at the beginning of each month throughout the year.
• Richard contributes $1,200 each year on the very last day for RRSP contributions deductible in the tax year.

After 25 years:

• Mark’s RRSP has grown the most to $69,788.
• Sean’s has grown to $67,958.
• Richard’s has grown the least to $65,837.

The Basics of RRSPs and Retirement Planning

A Registered Retirement Savings Plan (RRSP) is likely to be the single most important investment vehicle you will ever own, next to your home. While many people think that an RRSP is a specific type of investment, it’s really just a piggy bank into which you can put most popular investments, like GICs, bonds, mutual funds and stocks.

To encourage you to save for retirement, the government allows you to put money, up to a predetermined limit, into your RRSP every year. A major benefit of investing in an RRSP is that you deduct the amount you put into your RRSP from your income before calculating your tax bill for the year.

This will usually result in a tax refund. In addition, any money you make on the investments inside your RRSP isn’t included in your taxable income. All of the growth goes back into your RRSP investments – making you more money every year. This is known as tax-free compounding.

However, you do eventually have to pay taxes on your RRSPs. If you take money out of your RRSP, it is added to your income for that year and is taxed at your full marginal rate.

You can keep your RRSP going until the end of the year in which you turn 71. At that point, you have to collapse the plan, but there are ways to continue sheltering your savings from the Canada Revenue Agency through Registered Retirement Income Funds (RRIFs).

When to Borrow for Your RRSP

Consider borrowing when you haven’t set anything aside for your RRSP in a given year, or when you haven’t reached your annual contribution limit. In both situations, borrowing can make sense. That’s because putting money in your RRSP may reduce your taxable income for the year at the same time that it provides for your retirement.

To determine whether you should borrow money for your RRSP in a given year, you should check if you are eligible for a tax refund and also compare the interest you’re earning in your RRSP to the interest cost of borrowing (the former should outweigh the latter).

Key RRSP loan facts:

• By borrowing to increase your RRSP contribution to the maximum, you will, in most cases, reduce the taxes you’re required to pay.
• The cost of borrowing is at historically low levels.
• The money you borrow to invest will grow together with the rest of your RRSP investments – sheltered from tax and benefitting from the power of compounding.
• The following two scenarios help illustrate when borrowing makes

Borrowing to Make an Annual Contribution

Let’s say you borrow $5,000 at 5% and pay it back over 12 months. Your total interest cost is $135.00 (assuming the loan is repaid in 12 equal monthly installments of $427.92 with interest calculated monthly on a declining balance). Now, if you invest your $5,000 in an RRSP earning 6% compounded annually, the total interest earned is $300 in the first year.

So you’re ahead by $165.00. Plus, by making an RRSP contribution, you may receive a tax refund. For example, if you’re in a 35% marginal tax rate, you may receive a tax refund of $1,750 on a $5,000 contribution.

With a refund you may want to pay down your loan quicker or you could even invest your refund in your RRSP for next years contribution.

Maximizing Your Contribution

If you’ve already put some money into your RRSP over the year but wonder how you can put enough in to reach your contribution limit, it may make sense to borrow to maximize your contribution and then use the tax refund on your total RRSP contribution to pay back the RRSP Loan.

For example, let’s say your RRSP limit is $4,571 for the year, you have already contributed $3,200 and your tax rate is 30%. Therefore, you would need to borrow $1,371 to maximize your contribution. Next, divide $3,200 by 1 less your marginal tax rate. $3,200 / (1-30%) = $4,571.

Your total contribution would be $4,571 based on borrowing $1,371, which is also what you’d receive from your tax refund ($4,571 X 30% tax rate). In the end, you could use your refund to repay the loan in full!

Retirement Planning Tips

Start Saving Early

When you begin investing early in life, your money has more time to compound. This compounding effect adds to your accumulated savings. Therefore, the earlier you start building your RRSP, the smaller your total investment needs to be to fund your retirement years.

Diversify your assets

Studies show that proper diversification of investment assets helps increase overall returns, while at the same time reducing market risk.

Stay on course with contributions

A common rule of investing and saving is “Pay yourself first.” If you develop the habit of putting money every month towards your future, you’re more likely to achieve the retirement lifestyle that you want. Another important reason to make regular monthly contributions is that you can benefit from an effect known as dollar-cost averaging.

Since asset prices rise and fall over time, a strategy of frequent, equal-sized investments means you’ll buy more investment units when prices are cheaper and fewer when prices are more expensive. This approach tends to produce more robust growth in your portfolio.

Use catch-up contributions to save more rapidly

If you have contribution room in your registered savings account, it can be financially advantageous to use extra money that you have on hand to make catch-up contributions. This will increase the size of your savings nest egg, while further reducing your taxable income.

Devise an income strategy to outlast your retirement reserves

If you are getting close to retiring, or are recently retired, now is the time to think about developing a strategy that seeks to generate income from your retirement portfolio. With each step towards retirement, you can adjust your plan to reach your goal.

Looking for more ideas to help you plan your retirement? We encourage you to talk to us.

Thinking Early Retirement?

Some people could keep working for their entire lives, but others dream of retiring early. If you’re in the latter camp, the good news is that early retirement is possible.

Sure, it takes financial discipline, and you’ll probably have to make some changes in your spending and saving habits. But you don’t need a million dollars to be able to quit working. How much do you need? To determine the answer, you’ll require a comprehensive financial plan that lets you see the big picture and addresses all the small details.

There are many factors to consider. Let’s take a closer look…

What’s your number?

You can’t have an unmeasurable objective like “retire early.” In general, the steps required for someone to retire early in five years will be different than those required to retire early in 15 years. The first step to planning ahead for early retirement is to set a realistic retirement date. Then you can begin the process of working to achieve it.

How much will you need?

A widely accepted rule of thumb suggests you’ll need 80% of your pre-retirement income to maintain your current standard of living. But a recent survey of U.S. retirees by global investment giant T. Rowe Price found that, nearly three years into retirement, respondents were living comfortably on just 66% of their pre-retirement income.*

To be certain about your financial needs, you’ll have to create a retirement budget. Be as detailed as possible – and don’t forget about the expenses that you might pay only quarterly or annually.

How much do you have saved?

Odds are not enough. Otherwise, you’d be off sailing or sunning yourself on a beach at this very moment! If you need to save more aggressively to achieve your goal for early retirement, it’s imperative that you find ways to reduce your current expenses.

For instance, you could dine out less frequently, scale back your vacations and postpone buying that new car. The objective here is to save as much of your discretionary income as possible each year until your retirement.

It won’t be easy, but trimming your spending now is the only way to have a realistic shot at retiring early.

Do you have expenses related to your kids or their education?

If the answer is yes, you’ll need to account for your current and future expenses in your financial plan.

Are you still paying off debts?

Carrying debt into retirement was once considered dangerous and irresponsible. But today’s low interest rates have changed the game – as long as you borrow smart. Also, if you’re still paying off your mortgage, consider downsizing to both reduce your debt load and free up cash to invest.

Next steps – Maximizing your Investments

Once you’ve identified the key challenges you face, the question becomes how to overcome them. And one of the most important steps is deciding where to invest your money.

Because the bulk of you nest egg’s ultimate value will come from investment growth, not your initial savings. For most people, the answer will include a greater emphasis on growth-oriented investments. Plus, the more you can set aside and the sooner you do so, the faster your savings will grow – particularly when we make the most of your Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA).

Outside of registered plans, we’ll take a strategic approach to minimize tax consequences. When considering the growth-oriented options that are best for you, your risk-comfort level will be a key factor as will your time horizon. Our goal is to get as much growth as possible while keeping volatility within your comfort zone.

The old saying is that if you fail to plan then you’re planning to fail. Achieving the dream of early retirement starts with creating a comprehensive financial plan. If you’d like to talk about the possibility of early retirement, I’d be happy to review your plan and see what kind of adjustments might be needed.

* T. Rowe Price, “First Look: Assessing the New Retiree Experience,” July 29, 2014

Using RRSPs to Save for All Stages in Life

No matter what stage you’re at in life, an RRSP is likely to be the single most important investment vehicle you’ll use to save for retirement. The latest stats show that Canadians contributed $39.2 billion into RRSPs in 2015.*

In addition to building your retirement nest egg, you can also use RRSPs to save for major expenditures at various stages in your life, like using the Home Buyers Plan option to purchase your first home or the Lifelong Learning Plan option to enhance your existing credentials or embrace a new career.

Here are 5 benefits to investing in an RRSP

• Your contributions are tax deductible. Each year, you claim your RRSP contribution as a deduction on your tax return, and any unused contribution room for a given year can be carried forward indefinitely.
• Savings grow tax free. You aren’t taxed on the income earned in your RRSP until it’s withdrawn. This tax-free compounding allows your savings to grow faster.
• Flexible saving options. You can invest monthly, quarterly, annually or anytime you want to add to your account. Keep in mind that by investing early in life, and by contributing a little each month, instead in a lump sum at yearend, you’ll give your savings more time to grow.
• When you retire, your RRSP savings can be transferred into a RRIF or annuity to provide you with a pension like income. Subsequently, tax will be owed on the income you receive, but your income may be lower than in your earning years and with retirement tax credits, your taxes could be lower.
• A spousal RRSP can lower your taxes. If you earn more than your spouse, you can help build his or her tax-free savings by contributing to a spousal RRSP. Retirement income will then be split more equally between you—which may reduce your combined taxes.

Does Taking Out a Loan for an RRSP Contribution Make Sense?

Let’s say you borrow $10,000 at 5% to make a contribution into your RRSP. The cost in interest over a year is about $270. Although the interest on loans for RRSP contributions is not deductible, this negative is overwhelmed by the positive tax benefit.

Depending on your marginal tax rate, your tax saving is likely to be somewhere between $2300 and $4900.

Add the tax-deferred growth inside the RRSP, and you’re making got a pretty sweet investment.

LEARN MORE

*Statistics Canada, Registered retirement savings plan contributions for 2015
https://www.statcan.gc.ca/daily-quotidien/170224/dq170224b-eng.pdf

Personal Retirement Gap Analysis

January 2022

When planning for retirement, it’s essential to determine where you stand today and what your financial goals will be after you stop working.

Detecting Points of Weakness

A retirement gap analysis is a financial planning exercise that can help identify any shortfall — as well as other points of weakness — in your financial situation. It’s an important tool we use to ensure your retirement plan is on track to get you where you want to go.

A gap exists when a shortfall is predicted between your income and expenses.

Let’s say you hope to keep up the same standard of living in retirement as you enjoy today while you’re earning a regular paycheque. A good rule of thumb for maintaining your standard of living is to aim for an income at retirement that’s anywhere from 70% to 100% of your current income. If your analysis identifies a gap, you can use this knowledge to make appropriate adjustments to your current financial circumstances, your retirement expectations or both.

Source: 2019 Canadian Financial Capability Survey (CFCS)

Source: 2019 Canadian Financial Capability Survey (CFCS)

Conducting a gap analysis

Typically, a gap analysis is conducted as part of a multi-step process involving determining your goals, evaluating your assets and then estimating how much more, if any, you need to save to reach your goals.

It’s important to consider all facets of your financial life, including your assets, how much you’re saving, expected sources of retirement income (e.g., government pensions, RRSPs, TSFAs, workplace pension) and all anticipated expenses in your retirement years.

Step One

Estimate how much you would have to save to live the lifestyle you want.

Step Two

Using your present savings rate and investment approach as a guide, figure out how much money you’re on track to save by retirement.

Step Three

If you discover a gap between your predicted savings and the amount you would need to save, determine what you can do to make up the difference. In general, there are two methods you can employ: increase your rate of savings or adopt a more aggressive investment strategy that’s geared to reaching your goal. Often, the best solution involves doing both simultaneously.

Step Four

If the adjustments you’re able to make are not sufficient, you may need to reconsider your retirement lifestyle expectations. Perhaps, you could put off retirement for a few years, continue working part-time for a few years after retirement or reduce your retirement living expenses to stay within your budget.

Gaps are expected

When conducting a retirement gap analysis, you should expect that gaps will be detected:

• If you’re starting out in life and developing your first retirement plan, it’s common to find multiple points of weakness because you’ve never gone through the process of identifying gaps and filling them.
• If you already have a retirement plan and you’re conducting your annual review, chances are something in your circumstances will have changed, creating a new financial gap where none existed before.

When a gap is identified, you’re able to use this knowledge to make appropriate adjustments to your income, expenses or expectations in retirement. Simply saving for retirement is not enough. Creating a retirement plan and keeping it up to date is crucial.

It’s only after you’ve conducted a retirement gap analysis and fixed all the gaps that you can be confident in reaching your retirement goals.

Getting Started

Get started by calculating how much you may need to retire comfortably. Then you can decide on the type of retirement products that are best for your retirement portfolio.

retirement calculator