When you approach retirement, it’s important to have your finances in order. You’ll need to assess if your retirement savings are enough to last you the rest of your life. Or, if monthly income from Old Age Security (OAS) or Canadian Pension Plan (CPP) will support you.
You might consider the cost of long-term care and life insurance. In addition, how much money you’ll have leftover for your kids through your estate plan, if applicable. With careful financial planning before retirement, you can prepare to live comfortably. Let’s go over some common retirement questions below. The responses will assist with your pre-retirement planning.
1. Are retirement savings taxed?
In some cases, taxes apply to retirement savings. But the type of retirement savings determines whether or not tax is applicable. For example, taxes apply to the following retirement income sources and savings:
- Canadian Pension Plan
- Old Age Security
- Interest on non-registered accounts
- Rental income, capital gains on rental properties
- Dividends from a company
On the other hand, retirement income and savings from the following sources are not taxed:
- Tax-Free Savings Account (TFSA)
- Registered Retirement Savings Plan (RRSP)
- Registered Retirement Income Fund (RRIF)
2. Are retirement savings protected from creditors?
It depends. If you declare bankruptcy, creditors can take anything from your jewelry to your tax-free savings account (TFSA) balance. Thankfully, your Registered Retirement Savings Plan (RRS) is safe. Under the Bankruptcy and Insolvency Act, savings in an RRSP are not distributable. The only exception is funds deposited into an RRSP within the last 12 months.
3. Can you use retirement savings to buy a house?
Yes, you can use your retirement savings to buy a house. In a way, investing in a house is a way of saving for retirement too. We all need somewhere to live.
However, there are restrictions if you intend to withdraw from your RRSP. Plus fees for not complying with those restrictions. The Canadian government introduced the Home Buyer’s Plan (HBP). Under this program, you’re allowed to use up to $35,000 from your RRSP for a down payment, without penalty or tax. But, you need to pay the funds back within 15 years. Consider the HBP program like taking a loan from your RRSP.
4. Can you use retirement savings for college?
Yes, you can use retirement account savings for college.
If you intend to withdraw from your RRSP, there’s a program called the Lifelong Learning Plan (LLP). It lets you withdraw $10,000 per year from your RRSP for training or education for yourself or your partner. You cannot use retirement savings to finance your children’s education. If you’re interested in doing this, consider a Registered Education Savings Plan (RESP).
You must meet a few conditions to participate in the LLP. The main ones are that you’re a Canadian resident and enrolled in a full-time program.
5. Can I deduct retirement savings contributions?
Yes, contributions to your RRSP are tax-deductible. But, only up to a certain limit.
Contributions to regular savings accounts are not tax-deductible. In addition, contributions to TFSAs are not deductible.
6. When should I start saving for retirement?
The answer to this question depends on many variables, such as:
- Spending habits
- Employment pension
- Medical expenses
It’s ideal if you start saving for retirement as soon as you can. Saving early takes the pressure off scrambling to save closer to retirement. In addition, there is more opportunity for investment earnings on your savings.
Investing money into an RRSP or savings account for retirement is one option. However, you can also invest in other things which contribute to your net worth:
Investing in valuable assets is another way to save for retirement. Real estate, art, jewelry or other valuables contribute to net worth.
If you need money in retirement, you can sell valuable assets. Keep in mind that you will need to pay tax on capital gains or losses.
If you have a stable job with a generous pension, you have more security than someone who doesn’t. This doesn’t mean you shouldn’t save extra for retirement, but it does mean you have an income to support you.
Paying debts should be a priority over retirement savings. If you fail to pay debts, interest will accrue. Debt can come back to haunt you and the cost of interest makes it more cumbersome. Once you are debt-free, begin saving for retirement.
Everyone’s lifestyle is different. The cost of your lifestyle matters when it comes to retirement savings. Someone living in an urban area will have higher costs of living compared to someone in a small town, for example. Consider how you want to live when you retire and factor that into your plan.
7. What is the best retirement savings plan?
The best retirement plans consider your personal life, finances and lifestyle. Everyone’s plan will be unique. There is no one-size-fits-all solution, unfortunately. Here are some pros and cons for various retirement savings plans or accounts:
Tax-Free Savings Accounts (TFSAs)
Pros: Flexibility to withdraw money before retirement, investment income is tax-free
Cons: Contributions are not tax-deductible, contributions amounts limited
Registered Retirement Savings Plans (RRSPs)
Pros: Contributions tax-deductible, investment income is tax-free
Cons: Flexibility to withdraw only for specific events, like buying a house or investing in post-secondary education.
Pros: Appreciation, able to use the asset as a part of your lifestyle
Cons: Capital gains tax applies if you sell
Old Age Security and Canadian Pension Plan
Pros: Consistent, stable retirement income after you reach the age of 65
Cons: Possible obligation to pay it back if your income level surpasses a certain threshold
8. Can I withdraw retirement savings early without penalty?
You can withdraw funds from a regular savings account or TFSA, but not an RRSP. If you withdraw from an RRSP prematurely, penalties will apply. The only exception is under special programs, like the HBP and LLP. Oftentimes, the penalties incurred aren’t worth accessing the money early. You also risk losing the contributions permanently by withdrawing early.
9. Are there retirement savings plans for self employed?
Saving for retirement is harder for self-employed individuals because they must plan solely. Employed individuals often have support from their employer, such as with a pension. Opening and contributing to a TFSA and RRSP is a good starting point. Whenever you have excess cash, consider investing a lump sum.
If you’re self-employed and struggle to make a plan, consider meeting with a financial advisor.
If you don’t want to work forever, planning for retirement is crucial. The above common retirement questions should point you in the right direction. The earlier you start, the easier it will be to retire down the road. In addition, starting now will give you peace of mind. Be sure to consider your lifestyle, goals and finances when creating a retirement plan. If you’re ever struggling, consider financial planners. For more information about retirement, check out Consolidated Credit Canada’s webinar.