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Still unsure about the differences between a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP)?
The fact is it’s all about the tax. Here’s a quick refresher of the tax-free registered savings account:
How much can I put into my TFSA? Since the beginning of 2013, you can now contribute up to $5,500 a year. Your annual contribution limit will appear on your Notice of Assessment after your tax return has been processed. At the end of the year, any remaining balance will be added to your contribution limit in the following year. One great TFSA advantage is that there usually isn’t a minimum deposit required to open an account, which makes it easy to pay yourself first. And you can easily access your funds if you’re in a tight financial spot. It’s also worth noting that your withdrawals won’t compromise your eligibility to receive federal benefits like the Guaranteed Income Supplement, Employment Insurance or the Canada Child Tax Benefit. Any withdrawals you make can be replaced in the following year.
It’s a great retirement savings tool: If you’ve successfully reached your RRSP contribution limit, continue to make deposits to your TFSA, keeping in mind your annual limits. Remember, these deposits are tax-free and tax-receipt-free. In other words, deposits you make to a TFSA won’t reduce your taxable income, you won’t receive a tax receipt for your deposits nor will your withdrawals be taxed like an RRSP. By contrast, any deposits you make to an RRSP are deducted dollar for dollar from your taxable income in that tax year. For example, if you make $40,000 a year and contribute $2,000 to an RRSP, the tax on your income would be calculated on $38,000 only. However, any withdrawal you make from your TFSA will be tax-free and the funds are not declared as income.
Don’t forget to diversify: Consider shaking things up with a little diversification. You can choose investment options like stocks, bonds, mutual funds and guaranteed investment funds (GIFs). Also, you now have the option of borrowing your full contribution limit. However, unlike other investment loans, the interest paid on this loan cannot be used as a tax write-off. If you could afford to, contributing to each year’s maximums in both plans would be ideal. Of course, it comes down to finding a balance between creating a strong nest-egg and paying off debts. But, these tax considerations can certainly help you meet your long-term financial goals.
Posted: 02/19/2014 12:34 pm
Over the years that Desjardins Group conducted its retirement survey, two themes always came up: most Canadians avoid retirement planning and they’re sure they haven’t saved enough. So, how prepared are you?
A) You’re totally confident about your financial security and retirement plans, or;
B) You know you haven’t saved enough, but now you’re ready to make a plan.
If you answered B, the experts from Desjardins have some suggestions to help you get started:
1) Think about what your retirement will look like: Will you be spending your retirement travelling the world or will you just keep on working? According to the results in previous retirement surveys, more than half of respondents expected to do just that. Many said it was because working kept them active. But the most popular reason was financial. While it might be nice to think that you could continue your current working lifestyle well into your 80s. But life has a way of throwing you curveballs. The reality is that less than one retiree in five continues to work. In fact, events like job loss, a disability, becoming caregiver to a loved one, or simply fatigue can change your plans in an instant. This is why it’s important to visualize what your life might look as part of creating a solid plan.
2) Figure out how much money you’ll need to save: Keep in mind that you’ll likely need enough savings for a retirement that last 25 to 30 years. For example, the average 55-year-old woman who is a non-smoker will live to 86 while her male counterpart will live to 83. That being said, you will likely need a retirement income of about 70 per cent of your gross working income. Here’s a snapshot of the type of income sources you may have if you were retiring today:
1. An employer pension, if it was available to you
2. The Canadian Pension Plan
3. The Old Age Security Pension
4. Savings in an RRSP and/or TFSA
Since future retirees have no control over the amounts of the first three sources of income, creating a substantial nest-egg within your RRSP and other savings accounts will be an essential part of your written retirement plan.
3) Each year, review your plan: The golden rule to ensuring you have saved enough is to regularly review your objectives and adjust your plan as required, as circumstances can change quite often over 20 years. For example, there may be changes in the tax rules, new laws, interest rates and public pension plans that may affect your goals. But if you stay flexible, all this is manageable, giving you much better odds of attaining your retirement goals.