A Guide To Investing With Your RRSP
Preparing for retirement is important, and so is understanding how you can financially prepare to do so. In Canada, many people choose to use a Registered Retirement Savings Plan (RRSP) to buy, hold, and sell investments along their path towards retirement.
A RRSP is a retirement savings tool designed to help employees and self-employed individuals save money for retirement. Essentially, as a retirement savings account, you can contribute to the plan each year and those contributions will not be taxed until you withdraw them from the plan at a later date – such as when you retire. This allows most people to build to build a larger retirement fund by deferring income on investment income and gains.
Using Contributions To Buy, Hold, And Sell Investments
The contributions you make to your RRSP can be used to buy investments should you choose. If you earn income from those investments, that income is not taxed if you keep those funds right there in the same plan. The income, profits included, will not be taxed until you make a withdrawal from the RRSP.
The Canada Revenue Agency (CRA) oversees RRSP’s, setting rules regarding annual contribution limits, as well as types of allowable assets. There are two main advantages to using an RRSP tax-wise. First, as a contributor, you can deduct your contributions from your income, therefore paying less taxes in the year that you make contributions to your RRSP (or within sixty days of a calendar year which can be carried back to the previous year).The second advantage of RRSP investing for retiring is tax sheltered investments, allowing contributions to compound at a rate that is pre-tax. This means that you don’t pay taxes on your income and gains while you’re saving for retirement, but you will pay taxes upon withdrawal of the money from your RRSP, possibly at a lower marginal tax rate when you are in your retirement.
For 2020, the contribution limit for an RRSP account is 18 percent of earned income that you’ve reported for your 2019 tax return, capping out at $27,230. If you did not contribute the maximum allowable amount in prior years, these amounts are carried forward and become your unused contribution room. You are able to use this unused contribution room anytime and will also get a income deduction for those contributions.
If you desire to know your exact contribution amount for this year, or any leftover contribution room, see you’re the bottom of your latest Notice of Assessment from the Canada Revenue Agency.
Investing With Your RRSP
There are various types of Canada Revenue Agency approved investments that you can hold in your RRSP investment account. You’ll want to be sure that you’re only investing in what’s approved, or you’ll find yourself with some hefty penalty fees. Also, keep in mind that there are additional types of RSSP accounts, such as a Locked-In Retirement Plan, Restricted Locked-In Retirement Savings Plan, and a Spousal Retirement Savings Plan.
The following are some of the most common qualified investments in RRSPs.
• Canadian or foreign stocks trading on major exchange
• Gold and silver
• Savings bonds
• Government or corporate bonds
• Treasury bills
• Exchange-Traded Funds (ETFs)
• Mutual funds that are eligible for RRSP
• Mortgages and mortgage-backed securities in Canada
• Income trusts
• Guaranteed investment certificates (GICs), and
• Lifelong learning plans (LLP)
Can You Make Your Own Self-Directed Investments?
Yes, you have the choice to invest in your RRSP yourself. You can open your own brokerage account at an online brokerage and create your portfolio. This allows you to buy, sell, and oversee your entire RRSP account. However, if you don’t have much expertise in this area, or you’re not comfortable managing your own investments, there are third parties that will manage your investments for you or you can simply invest in balanced ETFs or mutual funds.
RRSP Investing: What Is The Annual Deadline?
Each year, you’ll have the first 60 days to contribute to your RRSP for income deduction purposes. For example, you can use your January and February 2020 RRSP contributions for your 2019 income deductions. Keep in mind that you can build up your savings quicker if you contribute early in the year by utilizing the power of compounding.
At What Age Do I Have To Withdrawal All Assets?
The year that you turn 71, you’ll have until the end of the year to contribute to the RRSP, but then you’re going to have to withdrawal all assets. Many people opt to then purchase an annuity or convert their RRSP into a Registered Retirement Income Fund (RRIF).
At What Age Can I Start Contributing?
As soon as you start earning wages, you can begin contributing to your RRSP. The sooner, the better, as you will want your contributions to enjoy the magic of compounding as soon and as long as possible.
Choosing The Best RRSP Investments
As you save for retirement and grow a comfortable nest egg, you will want to build a safe and diversified portfolio. By using a RRSP investing plan, you’ll be able to reach your retirement investment goals if you go at it wisely and consistently. If you don’t have expertise with investing, you’ll benefit greatly by allowing a third-party company to get you some principal protection and higher returns than you’re going to get elsewhere.