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Planning Your Retirement


RRSP:

Registered Retirement saving plan (RRSP) is a retirement Planning tool given to Canadian by CRA. Contribution to RRSP’s given us an opportunity to minimize taxes and maximize tax refunds.


How much should I contribute into RRSP?
Every individual's tax situation is different and expert advice is required. RRSP Contribution room can be obtained from your

CRA portal or from last year's notice of assessment. Maximizing the RRSP room can generate significant tax refunds but might not

be a good strategy for retirement planning. The reason being every dollar withdrawn from RRSP Portfolio is considered as income and fully taxable. Optimizing RRSP contribution requires an expert advice


If withdrawal from RRSP is taxable, why should I contribute to RRSP?
Many Canadians think the same way as RRSP is just a deferral of taxes why should I contribute to RRSP? Well, the whole idea behind contribution in RRSP is that in employment years our MTR (Marginal Tax Rate) is higher and that is why every dollar we contribute to RRSP generates a tax deduction at our MTR. In our retirement years our income is potentially  lower than the employment years.and therefore we save on Taxes. For example, if our MTR in employment years is 35% and we contribute $5000 in RRSP the additional tax refund will be $1750. And if we withdraw $5000 in our retirement years and our MTR at the time of retirement is 25% we will be paying $1250 in taxes. That translates into $500 net tax savings.


Why the money inside my RRSP Portfolio not growing?
Most of us really wonder that rate of growth is not really that great and since the withdrawal from RRSP is also taxable it is not worth contribution into RRSP’s. Well, it is not true. Rate of return depends on so many variables. For example, the investment vehicle you chose, the financial institution, the financial advisor etc.Most of the banks in Canada promote GIC’s thru their retail banking outlets and try to convince the clients to put money into GIC’s. As the prime lending rate has been low for last 10 years the rate of return on GIC’s has been very low. In fact the return you get in GIC’s is lower than the inflation. Therefore, putting money into GIC’s is basically depleting your capital as purchase power of your money is lost over the time. But again, investment into GIC makes a lot of sense if your investment horizon low that means you need the funds in a short period of time (Zero to 3 Years).


Can I use my RRSPs for the Purchase of my house?
Yes, you can. In Fact, CRA has given the Canadians the privilege of buying a house using RRSPs towards the down Payment of house. The maximum amount you can use towards the down payment of the house is $35000.


How does the first time  home buyer plans works?
There are a few conditions the homebuyer must meet. To learn about the homebuyer plan, click here.First time home buyer plan

 

TFSA:

Tax free saving account is very good retirement planning tool as the growth on investment is not taxable. It is surprising to many Canadians how TFSA has been sold by many financial institutions. TFSA has been sold as a savings account by many financial institutions including banks and a huge misconception in the minds of people is that TFSA is a savings account. Infact, this has created lot of confusion as some individuals have done a lot of transactions (deposits and withdrawals) and have exceeded the TFSA limit. We need to understand the TFSA is a Tax-Free Investment account and the annual limit for any individual is $6000 a year. If some one does not contribute to TFSA that year the limit gets carried forward.. The best part of TFSA is that in case of redemption the TFSA room gets recreated, but the individual must wait for one calendar year.If you really want to use TFSA as a retirement planning vehicle you must have a larger investment horizon.


What is my TFSA contribution Limit?
TFSA contribution Limit can be obtained  from your last year's notice of assessment. Alternatively, you can find out your contribution room on CRA portal.


What type of investments are available in TFSA?
You can have any investment vehicle in TFSA Stocks, bonds, or GICs. From financial planning standpoint any investment which can generate growth makes more senses as growth is Tax Free.


Can I invest in mutual funds under TFSA?
Yes, you can. Mutual funds can generate good returns but do have volatility associated  with them according to the market conditions and you should always read the fund facts before investing.


I have an existing TFSA with a bank and I am not happy with the return? 

This is a very common question most of investors wonder that why money is not growing at my bank or financial institution. More often than not the funds at a bank  are locked into GIC. You should always ask your bank that what is the fees or charges involved when I want to redeem these funds. As mention earlier GIC is a good vehicle only when you need funds in a short period of time (Zero to 3 years).

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