RSP: What is a Retirement Savings Plan?
A Retirement Savings Plan (RSP) is an investment account designed primarily for saving toward your retirement years. As a Canadian government regulated program, RSP's have special tax benefits. Your annual RSP contribution can greatly reduce the amount of income tax you pay in that year and the money you put away can have years of tax-deferred growth potential. You only pay tax on the amounts you withdraw. An individual is allowed to put up 18% f his/her earned income into RRSP's up to a maximum of $22,970 for 2012, $23,820 for 2013 and indexed to average wage growth thereafter.
You should consider an RSP if you want to:
- Supplement your retirement income so that you can maintain your lifestyle after you retire
- reduce your income tax this year
- earn tax-deferred investment income on your savings
- anticipate fluctuations in your income because of maternity leave, a return to school or a career change (making withdrawals from an RSP in years when you have little or no earned income can help equalize your income and you could pay less income tax overall)
Benefits of an RESP: Registered Education Savings Plan
- As education costs continue to rise, an RESP can help maximize your savings for your child. That means all your money starts working toward your savings goals right away.
- You can receive the Canadian Education Savings Grant (CESG). 20% of the first $2,500 of annual contributions made per beneficiary, up to a maximum of $500 per year ($1,000 when unused rights are used). For low income families, grants can be as much as 40% of the first $500 in contributions.
- The cumulative lifetime limit per beneficiary is $7,200
- Beneficiaries from low income families may also be eligible for a Canada Learning Bond ($2,000 over 15 years)
- Eligibility: age 17 or less (conditions apply for beneficiaries age 16 and 17)
- Choose from a wide range of GIC's and mutual funds to help your money grow.
- Your contribution can grow every year on a tax deferred basis.
- When RESP grants and earnings are withdrawn for educational purpose, they are taxed at the students tax rate, which is typically very low.
What is an Annuity?
An annuity is a series of regular, periodic payments that provide a steady reliable source of retirement income while allowing you to defer taxes on your registered plan assets.
Your annuity payment can form the core of your retirement income, meeting your basic needs without the worries of more complex or uncertain investments.
TFSA: Tax Free Savings Account
This is an investment plan that the government introduced in 2009. These investment plans are available to everybody in Canada over the age of 18. You are allowed to invest up to $5000/year into a Tax Free Savings Account. The contribution amount carries forward. In other words, if you have not contributed the maximum 2009 to date into a TFSA you can catch up from missed years. The money grows tax exempt and there is no tax consequences when the money is withdrawn. This plan is a great alternative for people who have investment money that is currently being openly taxed and for lower income earners where putting money into RRSP's might not be advantageous.