We’ve broken out each stage of the retirement journey and laid out steps you can take to prepare yourself for the retirement you’ve been dreaming of.
It’s a familiar story: an expert in the media sounds the alarm about Canadians not saving enough for retirement. This leaves many Canadians feeling that if you didn’t start early, you’re sunk. But even during the current strength of the markets, the old adage still applies; the best time to start doing something is now.
There is plenty of room for investment growth after 40
While starting early is great advice for those in their 20’s or 30’s, if you’re closer to 50 and haven’t started saving, you probably feel a little nervous about your financial future. But the thing is, your Registered Retirement Savings Plan (RRSP) enjoys tax-free investment growth until age 71, so even if you’ve recently hit the big 5-0, you still have 21 years of tax-deferred growth for your RRSP. This means that you don’t have to pay tax on your contributions or the interest until you take it out, preferably when you’re retired and your tax rate is much lower.
When it comes to RRSPs, your contribution room has been piling up since you got your first job, so a large, lump-sum contribution is possible. Of course, a large lump sum RRSP contribution will generate a nice tax refund. Re-invest this refund for your retirement and you will be even further ahead.
Try a TFSA
If you aren’t eligible to contribute to an RRSP, or have very little contribution room, you have another option: a Tax-Free Savings Account (TFSA). Available since 2009, TFSAs have become a popular alternative to RRSPs because you don’t pay tax when you withdraw the money. With an annual contribution limit of $6,000 for 2021, your TFSA may not provide enough contribution room to fund your retirement on its own. However, it’s an important piece of your overall retirement plan and should be considered at any stage of life.
So what’s the best plan?
As you reach the late stages of your career, your earnings will likely peak and be higher than your anticipated retirement income. Given the high marginal rate you’ll have at this time, it’s advisable to invest in an RRSP in order to defer taxes. If your contribution room has been used-up, any excess savings can be invested in a TFSA.
Generally, once retired, you will be in a lower tax bracket and excess income, up to your contribution limit, can be invested at any age in your TFSA. But, if you continue to have high income and are under age 72, or have a spouse under age 72, then RRSP contributions may be preferable to reduce that income, again, as long as there is contribution room available.
Just remember, your window for retirement planning hasn’t closed and it’s never too late to plan for your financial future. If you need to catch up on your retirement savings, ATB Wealth advisors are here to help you determine your options and maximize your results.
RRSP TFSA comparison
|Maximum contribution limit||✔️||✔️|
|Contribution limit based on income||✔️||✖️|
|Carryforward of unused contribution room||✔️||✔️|
|Contribution tax deductible||✔️||✖️|
|Maximum age for contribution||71||None|
|Tax sheltered growth and earnings||✔️||✔️|
|Withdrawals added to contribution room||✖️||✔️|
Editor's note: This article was previously published in March 2019 and has since been refreshed to make sure the insights we bring you are timely and curated specifically to help you thrive.
ATB Wealth® (a registered trade name) consists of a range of financial services provided by ATB Financial and certain of its subsidiaries. ATB Investment Management Inc., and ATB Securities Inc. are individually licensed users of ATB Wealth. ATB Securities Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.
The information contained herein has been compiled or arrived at from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness, and ATB Wealth (this includes all the above legal entities) does not accept any liability or responsibility whatsoever for any loss arising from any use of this document or its contents. This information is subject to change and ATB Wealth does not undertake to provide updated information should a change occur. This document may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions and conclusions contained in it be referred to without the prior consent of the appropriate legal entity using ATB Wealth. This document is being provided for information purposes only and is not intended to replace or serve as a substitute for professional advice, nor as an offer to sell or a solicitation of an offer to buy any investment. Professional legal and tax advice should always be obtained when dealing with legal and taxation issues as each individual’s situation is different.