With retirement at least 10 years away, you might be thinking about your plans for life after work.
• Start with a financial plan. If you have an existing financial plan that’s due for an update, or if you’ve never had one created, this is the time. With a comprehensive financial plan, you’ll have a better sense of the income you’ll need in retirement and actionable strategies that can help bridge any gaps in your income.
• Ride the RRSP bandwagon. Canadians contributed over $40.4 billion to their Registered Retirement Savings Plans (RRSPs) in 2016, according to Statistics Canada – and it isn’t hard to see why: investment income in your RRSP is earned on a tax-deferred basis, so you don’t pay any tax on it until you withdraw it. By that time, you’ll be retired and likely in a lower tax bracket due to earning less income. The result? Greater potential investment growth compared to a regular taxable account.
• Maximize your Tax-Free Savings Account (TFSA). With a TFSA, you can make contributions that grow tax-free, and you can make withdrawals any time, for any reason, also tax-free. What’s more, any amounts you withdraw are added back to your available contribution room the next year. In addition, TFSA income and withdrawals will not impact any federal income-tested benefits you may be entitled to, once retired, such as the Guaranteed Income Supplement (GIS) or Old Age Security (OAS). If you haven’t yet opened up a TFSA, you can “catch up” on previous years’ contribution room or gift funds to a lower-income spouse so they can maximize their own TFSA.
• Consider an Individual Pension Plan (IPP). An IPP is a defined benefit pension plan established by an incorporated business owner or professional that may enable you to make higher contributions compared to an RRSP and enhance your retirement income. The contributions are tax-deductible to your corporation, making it ideal for self-incorporated professionals and owner-managers.
• The Retirement Compensation Agreement (RCA). RCAs enable high-income earners such as senior executives to receive retirement benefits equivalent to what you would have received if you had not been subject to the contribution limits on registered plans. Contributions are 100% tax-deductible by your employer and are not taxable to you until you receive the benefits, when you may be in a lower tax bracket.
• Don’t forget non-registered investments. Even if you’ve contributed the maximum to your RRSP and TFSA, you might still need to save more to maintain your current lifestyle when you retire. By diversifying the stocks, fixed-income and cash investments in your savings plans, you build in protection from the risk of losing income from poor investment performance in any one sector, region or company. Speak to us to help determine a suitable investment mix for the time you have to invest and your comfort level with risk.
• Consider insurance to build wealth. Instead of exposing your non-registered investments to a high tax rate, consider investing through a tax-exempt life insurance policy. The income generated by your assets accumulates tax-deferred, as in a registered plan. For retirement income, simply use the insurance policy as collateral to secure a tax-free loan. When your estate is settled, the loan is repaid with the insurance proceeds, and the remainder goes to your beneficiaries, also tax-free.
• Plan for business succession. If you own a business that you plan to sell, speak to your tax advisor early in the process of restructuring the business ownership to minimize taxes on the sale.
If you are interested in learning more, contact us by email or by phone at 905-895-4102.
Connor Ryan, MBA
connor.ryan@rbc.com
905-895-4102