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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.
There is less freedom in how you can withdraw from an RRSP, compared to a TFSA. Withdrawals are classed as taxable income (unlike TFSA withdrawals). Low-income earners pay a low rate of income tax, so RRSPs don't make financial sense for this kind of investor (a TFSA would probably be a better option).
The meltdown strategy is based on the theory that it's more tax-efficient to make withdrawals from your RRSP or RRIF earlier in life, when your tax rate may be lower than the rate you expect in the year of your death.
If your current income is higher than your retirement income, you'll pay more taxes now. You lose out on tax-deferred compounding: Because RRSP contributions can compound over time, even a small withdrawal made today can have a big impact on your savings later.
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.
Commodity futures. Investments/stocks within a private company in which you are a designated shareholder. Personal assets (jewelry/art) Precious metals.
If you have already maximized your RRSP contributions, then a TFSA may be an option for you to save more money and get the benefits of tax-free growth and withdrawals.
Ms. Hasan says anyone making under $50,000 should focus on their TFSA or FHSA, since the tax deferral benefits for the RRSP are quite small if you're in a lower income tax bracket.
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.
If you have an RRSP and you move out of Canada permanently, you can either choose to: Make a lump sum withdrawal and deregister your RRSP. You'll have to pay withholding tax and income tax on the amount withdrawn. Keep your RRSP and have your investments grow tax-deferred for Canadian tax purposes.
You will pay income tax : the amount withdrawn from your RRSP could move you into a higher tax bracket. You could jeopardize your retirement : by withdrawing funds from your RRSP before retirement, you're only postponing your debt problems.
If the annuitant withdraws funds from the Spousal RRSP within 3 years of a contribution, that amount will be added to the contributor's taxable income in the year of the withdrawal.
By age 35, aim to save one to one-and-a-half times your current salary for retirement. By age 50, that goal is three-and-a-half to six times your salary. By age 60, your retirement savings goal may be six to 11-times your salary. Ranges increase with age to account for a wide variety of incomes and situations.
An RRSP is a retirement savings plan that you establish, that we register, and to which you or your spouse or common-law partner contribute. Deductible RRSP contributions can be used to reduce your tax.
Including your RRSP/RRIF in your income in the year of death could mean that someone in the lowest tax bracket could be taxed at the highest marginal rate in the year they die. This may discourage low-income individuals who have large RRSP portfolios and no qualified beneficiaries from investing in an RRSP.
Making an RRSP contribution can potentially reduce the amount of tax you will be subject to pay on your income tax return. The way an RRSP works is that it helps you save for the future while deferring tax. The amount you contribute to your RRSP is deducted from your taxable income in the year of the contribution.
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.
Introduction: My name is Domingo Moore, I am a attractive, gorgeous, funny, jolly, spotless, nice, fantastic person who loves writing and wants to share my knowledge and understanding with you.
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