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Learn about this critical RRSP blunder you should avoid and utilize Suncor Energy stock to bolster your retirement income.
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Adam Othman
Adam is a value investor who is always on the hunt for fantastic undervalued companies that he can share with Motley Fool readers. He follows Warren Buffett and Charlie Munger's investment advice and has completed the Canadian Securities Course. When he's not investing, Adam can usually be found traveling or skiing.
The Registered Retirement Savings Plan (RRSP) is a vital tool for Canadians who want to retire with a decent financial standing. It is a savings program that was launched over 60 years ago to help us live a comfortable life after retirement. Contributing to your RRSP as early as possible is critical to help you make the most of it.
The RRSP is effectively an investment account. It helps you grow your retirement savings. Registered with Canada’s federal government, you can enjoy some fantastic tax benefits from your RRSP. Perhaps one of the most significant advantages it offers is that the contributions you make to your RRSP can be deducted from your taxable income, lowering the amount you need to pay in taxes that year.
Tax-Free Savings Accounts (TFSAs) are growing in popularity since their introduction. They allow you to grow and withdraw your investments tax-free, but they do not offer the tax deductions the RRSP does. Additionally, contribution limits on TFSAs are typically much lower than RRSPs.
As beneficial as your RRSP can be, there is one mistake some Canadians make that can ultimately damage their retirement savings goals. I am going to discuss the error and what you can do to avoid it.
Withdrawing before you retire
There might come a time in your life that you have a significant expense to deal with. When that happens, many Canadians make the blunder of withdrawing funds from their RRSPs, and this mistake can become extremely costly for you.
The RRSP fund is taxed at a marginal or withholding taxrate every year. If you earn a decent income, the marginal tax income you are liable to pay will be quite high. The federal income tax rate on earnings exceeding $62,000 is 29%. Add provincial taxes to that, and you are looking at a potentially devastating loss of funds to taxes. For instance, the taxes applied in Quebec can take out 40% without even earning six figures.
If you withdraw funds from your RRSP before retiring, you may end up paying a significant amount more in taxes on the withdrawals.
What is the solution? A sound investment in solid stocks and holding the shares in your TFSA can do the trick.
A solution to your RRSP problem
Nobody sets up an RRSP with the intention of withdrawing funds earlier than they should. Usually, last-minute withdrawals come with high unexpected costs. I would urge you to devise a better way to deal with unforeseen expenses by setting up savings you can withdraw tax-free at any time.
The TFSA presents you with the option you need here. Instead of putting all your savings in an RRSP, consider contributing a share of it to your TFSA and invest in a stock like Suncor Energy (TSX:SU)(NYSE:SU). Suncor is one of my favourite stocks.
The company is a significant entity in Canada’s energy sector. Its shares have more reliable pricing as compared to other companies. The company’s share prices are less susceptible to fluctuation due to its integrated structure.
The company’s shares are trading at $42.72 per unit as of this writing, up 20.24% in the past 12 months. Suncor is also paying dividends at a juicy 3.93% yield.
Foolish takeaway
Holding Suncor stocks in your TFSA will give you the room you need to leave your RRSP alone. The company’s capital gainsand dividend income can offer your portfolio substantial growth. In case of rainy days coming your way, you can rely on the tax-free withdrawals from your TFSA rather than ruining the advantage your RRSP offers when you withdraw from it at the right time.
The 4% rule says people should withdraw 4% of their retirement funds in the first year after retiring and take that dollar amount, adjusted for inflation, every year after. The rule seeks to establish a steady and safe income stream that will meet a retiree's current and future financial needs.
Why is my registered retirement savings plan (RRSP) losing value? If you have an RRSP, the money in it is invested. This means that if the stock market or real estate markets drop, the value of the RRSP may also lose value.
Individual RRSP: The most common type of RRSP is a plan registered in your name. The investments held in the plan and all the tax benefits belong to you.
Deposits held in a Registered Retirement Savings Plan (RRSP) are protected separately from the eligible deposits held in other insured categories, such as those held in individual names.
Around the U.S., a $1 million nest egg can cover an average of 18.9 years worth of living expenses, GoBankingRates found. But where you retire can have a profound impact on how far your money goes, ranging from as a little as 10 years in Hawaii to more than than 20 years in more than a dozen states.
In fact, if you were to retire even 15 years from 2021, $53,600 would be about $79,544 in 2036 dollars, assuming a 2.5% inflation rate from now until then. Using that as your annual expenses, you could retire for about 25 years on $2 million.
One example is the $1,000/month rule. Created by Wes Moss, a Certified Financial Planner, this strategy helps individuals visualize how much savings they should have in retirement. According to Moss, you should plan to have $240,000 saved for every $1,000 of disposable income in retirement.
However, if you are in a lower income year and expect to be making more money next year, you might be better off holding off on that RRSP contribution, says Ian Black, a registered financial planner at Macdonald, Shymko and Co. Ltd., a fee-only financial planning firm in Vancouver.
A Registered Retirement Savings Plan (RRSP) is a savings plan, registered with the Canadian federal government that you can contribute to for retirement purposes. When you contribute money to a RRSP, your funds are "tax-advantaged", meaning that they're exempt from being taxed in the year you make the contribution.
If you expect to need cash for short-term expenses, such as rent, home repairs, college tuition, or medical costs, or if you expect to retire within the next few years, you may not want to invest more because your time horizon could prove too short for you to recoup any losses.
The amount of money you're allowed to contribute to a TFSA isn't based on your income, but rather dictated by an annual limit set by the Federal Government. However, unlike an RRSP, your contributions are not tax deductible, but withdrawals made from a TFSA are tax free.
401(k)s and Registered Retirement Savings Plans (RRSPs). have key similarities and differences, but both help citizens save money and allow it to grow tax-free. RRSPs are more portable than 401(k)s because they can be opened by a private citizen; 401(k)s are only available via employers.
Our response: All investments carry varying degrees of investment risk including those held within an RRSP. The value of an investment may go up or down depending on market conditions. While all investments carry risk, GICs and bank deposits for example, are considered lower risk compared to bonds or stocks.
Going a step further, calculations should be made to determine if you should withdraw funds from an RRSP. In many cases, we will recommend that people convert their RRSP to a RRIF before age 71. Age 64 or 65 are common ages for conversions to a RRIF, which we will explain below.
The decision of when to stop contributing to your RRSP depends on various personal factors like financial goals, retirement plans, and income stability. Consulting a financial advisor can provide tailored advice for your specific situation.
What can you hold in your RRSP? Like other registered savings plans, RRSPs can hold savings deposits and investments. Qualified investments – allowed to be held in an RRSP – include cash, gold, GICs, bonds, mutual funds, ETFs, and more. Investments that cannot be held in an RRSP include precious metals, commodity.
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