By planning your retirement early, you can enjoy your retirement stress-free without worrying about money. Whatever lifestyle you choose in retirement, you can set a savings goal accordingly. In today’s time, when the increased inflation rate has encouraged the BoC to raise its overnight rate and has led to subsequent increases in mortgage rates, it has become difficult to save a lot. Our Canada Retirement Calculator can help you calculate how much you need to save for your retirement and plan your retirement better.
There are different kinds of savings that you can start, such as a Registered Retirement Savings Plan (RRSP), Tax-Free Savings Account (TFSA) and other non-registered investments. Apart from these, you can also get benefits from the government during retirement, such as the Canada Pension Plan (CPP), Quebec Pension Plan (QPP) and the Old Age Security (OAS).
One of the most popular retirement savings vehicles in Canada, the RRSP lets your retirement savings grow tax-free, which means you do not pay tax on any gains on such an investment as long as the investments stay in the account. An RRSP account is tax-deferred, which means you don’t pay any taxes on the part of your income that you contribute to your RRSP account; however when you start withdrawals, the withdrawals are treated as regular taxable income. This is beneficial as it allows you to move income from your peak earning years, when you would have a higher marginal tax rate, to your retirement years, when you would most likely have a lower marginal tax rate.
You can contribute to an RRSP account until the age of 71, after which you must withdraw the entire amount at once, convert it to an RRIF or purchase an annuity with it. You can withdraw from an RRSP at any time, but you would have to pay taxes on such withdrawals. Your financial institution withholds a minimum withholding tax; if they are not enough to cover the taxes you owe as per your tax bracket, you will have to pay additional taxes. The only exceptions are borrowing from your RRSP to purchase your first home using the Home Buyers Plan (HBP) or going back to school with the Lifelong Learning Plan (LPP).
Another popular retirement savings medium is the TFSA, which allows your investments to grow tax-free. Anybody who is the age of majority in their province of residence can open a TFSA account.
The government decides on an annual TFSA contribution room every year, which is the maximum amount you can contribute to your TFSA account. The TFSA contribution room for 2022 is $6,000. The contribution limit in the past years was:
TFSA contribution room is indexed to inflation and rounded off to the nearest $500. The TFSA contribution room is also rolled over each year, which means if your contribution limit this year was $6,000, but you contributed only $4,000 to your TFSA, next year, you can contribute an additional $2,000 to your TFSA.
Withdrawals from TFSA are not taxable; however, you get that contribution room back only on the first day of the following year. You can Calculate your TFSA Contribution Room using WOWA’s TFSA calculator.
As opposed to the savings in RRSP and TFSA, the growth in savings in non-registered accounts is taxable. The interest earned is included in your income and is subject to income tax, just like your regular income. However, dividends earned are taxed at a lower rate. Our Income Tax Calculator can help you calculate the taxes you will pay as per your income and investments.
Even though non-registered accounts don’t offer any tax benefits like the registered accounts, they don’t have any limitations like the registered accounts do. You can open a non-registered investment account with a brokerage and start investing in stocks, Exchange Traded Funds (ETFs), Guaranteed Investment Certificates (GICs) and more.
Canada Pension Plan is a taxable benefit available to Canadians over the age of 59. To be eligible to receive CPP payments, you have to be at least 60 years old and must have made at least one valid CPP contribution. It is a monthly benefit which replaces a part of your income in retirement. The amount that you receive depends on the age when you choose to start the CPP pension and your average earnings during the years that you have worked. CPP payments are not automatic, and you need to apply to receive CPP.
The standard age for starting CPP is 65 years. However, the earliest you can receive CPP payments is at age 60, and you can choose to defer CPP payments until 70. The monthly payment amount increases for each month you choose to defer the payments. Along with the CPP pension payment, you can also qualify for other CPP benefits such as Disability Pension, Survivor’s Pension, Death Benefit etc.
The residents of Quebec are eligible to receive the Quebec Pension Plan (QPP) payments instead of the CPP.
Old Age Security is a monthly benefit available to seniors who are 65 years or older. In most cases, you get enrolled automatically; however, in some cases, you may need to submit an application at Service Canada. Similar to CPP, you can choose to defer the payments and receive a higher pension amount for each month that you defer till the age of 75.
The payment amount depends on your income and the duration that you have lived in Canada or a country with a social security arrangement with Canada after turning 18.