Saving for your retirement
If you are not in a defined benefit pension plan, then you can save for your retirement in many different ways:
- Through a Registered Retirement Savings Plan (RRSP)
- With a Tax Free Savings Account (TFSA)
- In a savings account
- With other investments
While having a dedicated retirement savings plan is recommended, you can use any savings or investments towards your retirement. The main benefit of having an RRSP or TFSA over other savings or investments are due to the significant tax advantages of these plans.
An RRSP is a savings account specifically for retirement and generating retirement income. You can have a personal RRSP with different financial institutions like a bank or a group plan with your employer.
The main benefit of an RRSP is that you receive tax credits for any amount you add into an RRSP (up to your yearly maximum). This credit will reduce how much tax you owe and can even be put back into an RRSP or a TFSA for additional tax savings.
When you reach retirement age, your RRSP will be converted into a Registered Retirement Income Fund (RRIF) or Life Income Fund (LIF) if you were in a pension plan, which are dedicated accounts where you will take money out of for retirement. By having this specific fund, you can automate your withdrawals and ensure you get monthly income.
A TFSA is a specific savings account that can be used for retirement. As with an RRSP, you can have a TFSA with different financial institutions.
The main benefit of a TFSA is that any money you withdraw from a TFSA is on a tax-free basis. The down-side is that the limits to how much you can add to a TFSA each year are quite low compared to an RRSP.
If you were to save money every month for your whole career and add it to a TFSA (up to the maximum) then you could withdraw a substantial amount of money after you retire and not pay any tax on it. This could be very beneficial and is a very attractive feature of TFSAs.
You may have stocks, bonds or specific company shares which you could use for retirement.
While these investments won't offer any tax savings, they may provide a higher rate of return or provide you with more control over your investments. It is worth noting that when you withdraw funds from investments, you will be taxed either at your marginal tax rate, or potentially on a capital gain depending on the type of investment.