There are many ways to save for retirement. Some Canadians have access to a retirement savings plan through their workplace. This type of plan allows you to make additional contributions, often with the benefit of matching contributions from your employer. For saving on your own, you basically have two options: registered and non-registered savings.
Registered savings plans
These plans are “registered” with the Canada Revenue Agency (CRA). That means that they receive certain tax advantages. But they may be subject to CRA rules around how much you can contribute each year, what you can invest in (mutual funds, ETFs, GICs, individual stocks and bonds) and how withdrawals will be taxed. Common examples include Registered Retirement Savings Plan (RRSPs) and Tax-Free Savings Accounts (TFSA).Non-registered investment accounts
These accounts do not offer the same tax savings and deferral benefits of registered options. Instead, you can easily access your money and control how much you contribute or withdraw. All investment income is taxable. The amount may depend on whether the investment income is from interest, dividends or capital gains.Many Canadians choose RRSPs to save for their retirement. Here’s why:
1. You can lower your income taxes.
RRSPs provide you with important tax advantages. First, there’s the immediate tax benefit of being able to deduct your RRSP contributions on your income tax return. The higher your marginal tax rate, and the more you contribute to your RRSP, the greater the tax benefit.
However, there are limits to how much you can contribute each year. For 2024, you can contribute 18% of the income you earned in the prior year, up to a maximum of $31,560, after any pension adjustments. If you have any unused contribution room from previous years, you can carry that forward to another year.
Also, any income and gains you earn on investments within your RRSP will grow tax-deferred until you withdraw from your RRSP or Registered Retirement Income Fund (RRIF) in retirement. At that point, all withdrawals are taxed as ordinary income at your marginal tax rate. There are still a few benefits here though, because you may be in a lower tax bracket by the time you make those withdrawals than when you were working, and you may be able to use income-splitting strategies between spouses.
2. You are less likely to withdraw money early because of taxes.
With a TFSA or non-registered investments, you may be tempted to dip into your retirement savings if a major expense comes up. Try that with your RRSP and it will cost you in a couple of ways. First, you may have to pay withholding tax of up to 30%. Second, you lose the contribution room associated with those funds permanently.
There are other ways to use your RRSP, which may provide additional benefits.
- The Home Buyers’ Plan: To address the shortage of housing options, high rent prices and consistently increasing home values across the country, the 2024 budget proposes changes aimed at making home ownership easier for first-time buyers. The changes are as follows:
- Increased withdrawal limits: The budget proposes that Canadians could withdraw as much as $60,000 from their RRSP, up from the previous limit of $35,000. Couples purchasing a home together would be able to withdraw up to $120,000 from their RRSPs to purchase a new home.
- Extended repayment grace period: Funds withdrawn under the HBP must be repaid to their RRSP over a 15-year period. At least 1/15 of your withdrawal must be repaid to your RRSP each year. Up to now, the repayment period began as of the second year after the first withdrawal was made. The budget proposes to temporarily defer the start of this repayment period by an additional three years. So, for anyone making their first withdrawal between January 1, 2022 and December 31, 2025, they would have five years before repayment must begin.
- Increased withdrawal limits: The budget proposes that Canadians could withdraw as much as $60,000 from their RRSP, up from the previous limit of $35,000. Couples purchasing a home together would be able to withdraw up to $120,000 from their RRSPs to purchase a new home.
- With the Lifelong Learning Plan, you can borrow up to $10,000 a year from your RRSP ($20,000 maximum over four years) to go back to school full-time. Again, there are rules about eligibility, and how and when you’ll need to pay back this money.
Discuss other retirement savings options with your financial advisor to determine what’s best for your financial future.
To sum it up, the economy and businesses are constantly adapting to changing conditions. Sometimes that process is painful. But if recessions are painful, they are typically very short. Over the years included in the chart above, the economy was in recession for a total amount of time equivalent to 9.1 years. That’s less than 15% of the time.
That’s good news for investors who stay in the market for the long term - whether we’re in a recession now or not.