#rrif

RRSP Basics – Age of Withdrawals, Rules, Taxes and Other Info

I am finding basic, easy-to-understand information about the RRSP hard to decipher on the internet between the Canada Revenue Agency and even bloggers.

As there aren’t many Canadian bloggers, I figured I’d step up and tell you what I have learned in a simple to understand manner.

FYI

RRSP (Registered Retirement Savings Plan)

RRIF (Registered Retirement Income Fund)

RRSP / RRIF is a tax DEFERRED…

I’ve joked in the past about being retired at different points in my life, specifically when I was 28, and again at 35. At those respective ages, I was transitioning careers by getting a Masters; and leaving a full-time job to work on my own projects. In both these instances, I had also applied and received grants and scholarships to cover my cost of living for at least a calendar year. I felt free to do my own work, but I always knew how to budget.

Having freelanced for the majority of my adult life, I knew that incoming cash flow would be inconsistent and that outgoing cash flow would still need to be paid like clock work every month. When you don’t have a regular paycheque coming in, my go to is to break down my existing funds (be it a lump sum grant or my savings), and pay myself a flat monthly fee over a predetermined period of time that covers my base living costs. The time period is usually set by the value of the lump sum divided by my monthly expenses, so understanding your monthly cash flow is extremely useful. 

Keeping track of my expenses has trained me to live within my means, which allows me to put more toward my savings whenever possible. Living on a fixed-income allows me to better understand my finances and to really identify what it is I am spending my money on now and helps me anticipate what I will likely spend my money on in the future.

Most of you whom I’ve talked to think retirement will be impossible, or that you will need to save upwards of two million dollars to retire in comfort. Both these scenarios are as real as you want them to be, but the one thing they have in common is that no matter what amount you have in the bank when you’re older, you will have to learn how to live on a fixed-income.

So what does “fixed-income” mean?

Simply, fixed-income means have a steady stream of cash flow paid out to you for the remainder of your estimated life. Sounds ideal, no? No matter how you cut it, the first step to building a fixed-income stream will likely begin with savings and investing. 

For the most part, fixed-income payments stream out of your savings and investment pool, which has been hopefully accruing a double digital rate of return and compounding for a couple of decades or sitting in property, a trust, or a profitable business. A Registered Retirement Savings Plan (RRSP) is a cheap and easy place to store investments as it penalizes you for early withdrawal and offsets your annual income tax until you withdrawal at retirement. You can even delay paying taxes on your pool for even longer as a RRSP can also be streamlined into a Registered Retirement Income Fund (RRIF) before the age of 71. RRIF is set up so that your savings and investments can continue to modestly grow, but you will be required to withdrawal a certain percentage each year (on which you will finally have to pay taxes). 

If you’re a young retiree (aka artist living on a grant or from grant to grant), you may want to apply some of these principles of fixed incoming living to your next grant or project. 

First things first, pay yourself! If you received a grant, throw 10% if you can into your RRSP. The amount you contribute each year to your RRSP offsets your taxes depending on your marginal tax rate (federal tax bracket + provincial tax bracket). As long as you have contribution room in your RRSP, put aside 10% of that year’s income. This should be a portion of your artist/administrative fee. 

Second, put the remainder of your grant money into a separate savings account (ideally one that offers some interest, at least .75% please). The savings account should be still easily accessible that lets you withdrawal at least once a month for free. A simply savings account at any bank will do. You want to keep this grant money separate from your every day funds as the more you have in your everyday account, the more you are likely going to spend it everyday. A side bonus of this extra step is that the funds can earn some interest each month, too. 

This next step is the clincher: break down and anticipate monthly costs of your project and pay yourself monthly payments (ie. transfers from savings to chequing). In doing so, you stay on top of your finances each month so you don’t feel surprised when the money runs out, and whoops! your project isn’t done. This happens all too often, and then you’re dipping into your savings or a line of credit or a credit card, amassing unnecessary debt even when you had the money literally in the bank.  

Your project funds end up being low-level managed and have a greater chance of finishing on time and on budget, and since the first thing you did was pay yourself, you can rest assured that you are providing for your future self.

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So you're not one of those folks with a fancy shmancy "employer pension". No problem, you'll just start saving right? A decent DB pension has been estimated to be worth about $1 million in the bank. You better get on that whole "saving" thing immediately.

There are a few tools that can help, but it is not an easy route.

First things first. Disclaimer : I am not a financial expert. I'm a policy wonk. If you need help learning more about investments and how to save/make money, you should probably consult a financial planner. Go to a bank/credit union or talk to someone who is insured in case of liability...which I am not. Don't sue me please.

Alright, that's out of the way, so what are the tools available for personal savings for pensions?

Registered Retirement Savings Plan (RRSP) - Probably the best known of all savings vehicles in Canada. Contributions are tax deductible and so is the growth within the fund. So if you invest the money in your RRSP, you don't pay taxes on that money and on the earnings. You do, however, have to pay taxes once you start taking that money out. And you do have to take that money out. You can do it early (and pay more tax) or when you hit 71 you have to take the money and put it into a     Registered Retirement Income Fund (RRIF) which has a minimum amount of money you have to take out of your savings per year (it starts at about 7% in your early 70s then reaches %20 of your savings per year when you reach 95).  There's also a maximum that changes every year according to the Income Tax Act. This year the max is  $24,930.  On a side note, RRSPs are REALLY under used. In Canada people use about 5% of the room available for saving. Yeeouch.

Tax-Free Savings Accounts (TFSA) - These new fangled things     popped up a couple of years ago and they can be really useful. Now, there are political issues that I'll get into another day (apparently not paying taxes has budgetary consequences, who knew?) but at the moment let's just focus on what they are and what you can do with them. A TFSA is a savings  account...which is tax free (heh.) It has a limit of $5500 a year (the 2015 budget will expand it to $10k). You can take it out anytime you want (but if you take money out, you can't put it back in without some penalties). You can also set up automatic deposits from your bank account. Even small amounts add up. Say you get paid bi-weekly and you put $50 from each cheque into a TFSA. After only a single year, without interest, you'll have $1200. That's like, 40 two-fours of beer! (or some other better investment...)

Which is better? Well, it really depends. Talk to a financial advisor to find out if RRSPs or TFSAs are better for you (or if you should use both!) Ha, how's that for a cop-out?

How much should you save? That's a good question. Let me start by askng you a question : how much do you spend? How much money do you expect to spend in your retirement? Some experts estimate about 10-15% of your salary should go to your savings, especially when you're young. See there's this magical thing called "compound interest". It's interest on interest. The more you save, the more interest you make, the more interest you get on that interest. Dollars you put aside when you're young make you a bunch more money over decades than the money you put aside 5 years before retirement.

What's the moral of the story? If you don't have a pension, you have options but you need to save your money. Some employers have group RRSPs which are kind of cool because your money is pooled with others and it can do a bit better (that bulk buying thing coming into play again). If your employer offers to match your contributions, F**KING DO IT.