Wealthy Retirement

Retiring Wealthy

Will you be able to live comfortably when you enter retirement after all those years? Will you be rich? Will you be comfortably rich?

These are some of the issues which the aging taxpayer will face.

Governments at all levels have long recognized the need for adequate funding mechanisms to help retiring taxpayers.

The RRSP and the RHOSP were introduced as tax deferral vehicles to encourage Canadians to save for retirement and to purchase a home respectively.

Under a Registered Home ownership Plan a taxpayers could claim a deduction up to $1000 for 10 years.

The money would accumulate tax free and could be used to purchase a home. Withdrawals not used to purchase a home were taxed as income.

In 1985 registered home savings plans were repealed and the deduction is no longer allowed.

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The Registered Retirement Savings plan was first introduced in 1957 and allows a taxpayer to claim a deduction equal to 18% of the previous year's earned income, up to a prescribed maximum limit.

The contributions accumulate tax free within the plans, but are taxable when withdrawn.

At the time, when it was introduced, it was thought that the Canada pension Plan benefits would not be adequate for future generations.

The RRSP then was a way to provide additional funds when a taxpayer finally leaves the labour force. And the government was going to help you do it.

Over the years the RRSP has continued to grow in popularity.

In 2005, the number of contributors rose to its highest level in four years with 6.1 million Canadians contributing $30.6 billion to retirement plans.Of the 86% of tax filers in 2005 who were eligible to contribute to an RRSP about 31% actually made contributions.

The majority of the contributions were made by high income earners with contribution amounts decreasing as income decreases.

Today, the RRSP deduction, is probably still one of the best tax deductions available to the average taxpayer.

The advantages are many

  • Accumulation of a nest egg on a tax free basis

  • Tax deduction from current income which lowers current taxes payable

  • Flexibility. The contributions can be withdrawn at anytime, subject to some conditions. There may be a tax consequence as a result of withdrawing funds from your RRSP at the wrong time.

  • Very easy to set up an RRSP account

  • Partially protected from creditors

  • Funds can be withdrawn tax free towards purchase of home

  • Funds can be withdrawn tax free for continued education

  • No restrictions on foreign content

  • Diverse investments permissible

  • No minimum age

  • Provides income splitting opportunities

  • Unused contribution room can be carried forward indefinitely

  • Unclaimed contributions can be used in future years

  • Transferable. can have beneficiaries

When used to its full potential, the RRSP makes an extremely powerful tool with which to defer taxes while creating and preserving wealth.

There are numerous strategies in which the RRSP can be utilized to create wealth and with the introduction of the TFSA, taxpayers now have greater flexibility to preserve their nest eggs and a potent vehicle to retire wealthy.

Common RRSP Mistakes

Despite being around for many years, the RRSP is still very much misunderstood by a lot of taxpayers. Most of the confusion centers around the taxation on withdrawals from RRSP funds.

Retirement savings are tax deferral strategies which means that the taxpayer chooses to put off paying taxes on a portion of her income now until later when it is more favourable. These are long term investments in her future. THEY ARE NOT REGULAR SAVINGS ACCOUNTS

Mistake number 1. Putting bad money into an RRSP. Funds for vacations, home renovations, birthday parties and anniversaries or any short and medium term projects are not funds which are suitable for retirement savings plans.

Mistake number 2. Withdrawing funds at inappropriate times such as when you are working. This may put the payer in a higher tax bracket thus attracting more taxation

Mistake number 3. Withdrawing funds for the wrong reasons. Under some circumstances funds, can be withdrawn from a registered account without being taxed. These include buying a home (HBP) or continuing education.(LLP). When funds are withdrawn for reasons other than that they will be taxed.Click Here to take survey

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Tax Free Savings Accounts

In January, 2009 Canadian eligible residents will be able to open a tax free savings account (TFSA) which will allow funds to accumulate tax free and also to allow tax free withdrawals. These accounts will be able to hold similar investments as an RRSP and opens up the opportunity to reduce RRSP holdings before retirement and still maintain growth while reducing tax exposure during retirement.

TFSA

VS

RRSP

Maximum Contribution $5000, 2009, indexed to inflation thereafter   18% of previous years earnings, up to maximum
     
Contributions made with after tax dollars. Not tax deductible   Contributions made with pre-tax dollars. Tax deductible
     
Contributions grow tax free   Contributions grow tax free
     
Tax free withdrawals   Withdrawals fully taxable
     
Contribution room not lost on withdrawal   Contribution room lost on withdrawal
     
Unused contribution room can be carried forward to future years   Unused contribution can be carried forward to future years

Under some circumstances, it may be advantageous for a tax payer to drawdown her RRSP portfolio, before retirement. How she withdraws it can determine the amount of taxes paid.

  

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