December 9, 2023

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A Primer on RRSP

An RRSP is a nest-egg account that you (or, in the case of a spouse RRSP, your spouse or common law partner) can contribute and use to purchase investments. You earn new RRSP room based on a percentage of your earned income, and the contribution reduces your taxable income for the year. You can check your RRSP cell on your assessment notice to make sure you are not over-contributing. If you don’t max out your RRSP each year, the unused portion of your contribution room turns over to subsequent tax years. You can hold cold, hard cash as well as eligible investments like ETFs, mutual funds, GICS, stocks and bonds in your RRSP. (Here’s how to determine whether your savings should be invested in an RRSP or TFSA.)

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When you retire, or by the time you turn 71 on December 31, you typically convert your RRSP into a Registered Retirement Income Fund (RRIF) from which you receive the money. RRSPs can also be used to purchase an annuity before age 72, but RRIFs are more common. The savings you have in your RRIF are tax-deferred until they are paid, at which point they are taxed. More on that below.

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Why Use RRSP to Save for Retirement?

When you save money in your RRSP, you are not only preparing for your future. Your current self can also benefit greatly, as those contributions are tax-deferred, and contributions generate a tax refund. If, like most Canadians, your tax bracket at retirement is low, you are likely to benefit from making RRSP contributions.

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How to Maximize Your RRSP Contribution

When it comes to getting the most out of your RRSP, timing is everything. “When you’re in a higher tax bracket, you should use deductions,” Forward advises, adding that you can save deductions you take when you’re in a lower bracket and later when you need them. So you can claim them. Like the RRSP cell, undisclosed RRSP contributions can be carried forward. She says the other big benefit of RRSPs is that “the investment grows tax-sheltered while you’re in the plan.”

How Much Do I Need in My RRSP to Retire?

Determining your target amount is highly individual and will depend on several factors. Forward recommends that you start by considering the following variables:

Age at which you wish to retire Your savings rate Your workplace RRSP or Pension matching program Jeevansathi Your access to RRSP

Also, identifying your future needs is a priority. “The challenge is anticipating how your spending needs will change during your retirement years,” says Forward. Significant expenses like a mortgage can be paid for by retirement and you can depend on a significantly lower tax bill. On the other hand, she says, you might plan to complete home renovations or travel in retirement—activities you’ll need to budget for. “Everyone is different, but I speak to many retirees to find that they are spending 60% to 70% of their current income in retirement.”

Account for other retirement income sources as well. “Once you’ve established your target spending needs and retirement age, you’ll need to estimate your guaranteed income sources,” Forward says. These sources can include Canada Pension Plan (CPP)/Quebec Pension Plan (QPP) and Old Age Security (OAS). These can be verified with Service Canada (CPP/OAS) or Retraite Quebec (QPP).

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How much do I need in my RRSP by age?

Once you know how much money you’ll need in retirement, Forward says, you can work backwards to signpost your savings goals. As an example, let’s say you set a retirement goal of $40,000 a year in pre-tax income and you want to retire at age 65. If your pension and CPP/OAS contribute $20,000 (closer to the maximum), you’ll need an additional $20,000 annually to meet that goal. If you live to age 95, you’ll need a total of $600,000. Might be possible. Compound interest will help you get there. let’s take a closer look.

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