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Is the Rrsp the Most Effective Savings Plan for your Retirement?

Yvonne Finn: Is The RRSP The Most Effective Plan For Your Retirement?

For many years Canadians have been relying on the income from their RRSP, which was instituted in 1957, to fund their retirement years.

Now, however, the small rates of return, taxes and inflation are threatening to reduce the income generated by RRSP's to a barely livable amount.

When you retire after 20, 30 or 40 years of earning an income, you expect to reap the rewards of your hard work and good planning.

The RRSP was meant to provide financial security to the Canadian taxpayer and it actually pre-dates the Canada Pension Plan by almost 10 years!

What is an RRSP?
RRSP is an acronym for: Registered Retirement Savings Plan .
It means that you have started a savings plan for your retirement and you have told the Government so, by registering it with an accredited seller of the plan.

That's it!

Because you have taken the initiative to financially support your retirement, thus lessening the burden on the Government, you will get some benefits from purchasing and funding your RRSP.

What are the benefits of an RRSP?
• Tax reduction
• Tax deferral
• First time home buying/Continuing education

Tax reduction:
Your taxable income will be reduced dollar for dollar by the amount you contribute to your RRSP.
As an example: If your income is $55,000 per year and you contribute $5,000 to the plan you will pay taxes only on $50,000 for that year.

Tax deferral:
The income in the RRSP is tax sheltered until you make a withdrawal or upon retirement.

First time home buying/Continuing education:
Home buyers are allowed to make a one time withdrawal of funds in their RRSP to help purchase their first home.
However the rules for utilizing this strategy seem to change often, so do your homework or ask the advice of a professional with expertise in this using strategy.

As a retirement planning tool the RRSP is still a good strategy.
However, due to the increasing restrictions being placed on the contributions to the plan, it is not the most effective and should be used in conjunction with other more tax effective and income producing strategies.

As an example:
More and more Canadians are earning incomes in excess of $100,000/Yrly; however, the maximum allowable contribution per annum is capped at %18 or $19,000.
This will not provide much of a tax relief and in Canada this individual will still be taxed at the highest tax rate.

The banks and the Government do benefit when taxpayers employ the RRSP as their only tax reduction and retirement strategy.
So, it is in each individual income earner's best interest to become financially knowledgeable and empowered to ensure that they are using as many effective retirement planning tools as are available.

Don't let poor planning put your retirement at risk!