Twenty-twelve is a year of opportunity! This is not residual holiday cheer talking; nope, I am positively optimistic that this year will see us collectively implementing lessons learned and taking control of those things that matter, like financial security, comfortable retirement and maybe even having a little fun! Out with the old dystopian gloom and in with the promise of living longer, better and happier. How? Well, quaint though it may sound, I find it best to start with a plan and take small steps toward clearly defined goals. After all, the best way to prepare for whatever comes our way is to, well, be prepared. This post provides some information on RRSPs and hopefully invigorates your savings strategy for 2012.If long-term saving is your goal, then an RRSP may be your best bet: withdrawal penalties make it difficult to plunder; direct deposits allow you to pay yourself first without any noticeable impact on day-to-day finances; tax refunds can be used to pay down other debt and many companies offer matching programs that help your own contributions grow even faster.
The average age of retirement in Canada recently began to climb after years of decline; in fact, a jump to 62 was the first increase in twenty years. We are working longer to ensure (crossed fingers!) a comfortable retirement due to reduced wages, increased costs of living and investments that have turned out to be less than we’d once hoped. All is not lost and there’s no need to panic, it’s just time to re-commit to long-term goals. In fact, working longer may have some benefits to your health, well-being, pension-planning and productivity. Why save your bucket-listing for retirement when you can live more every year while saving for the long-term?
Here are some facts about RRSPs that may help you plan your 2012 savings strategy. And the good news is that you still have almost two months to contribute and get credit for 2011!
- Anyone between the ages of 18 and 71 who has earned income and filed a tax return can contribute to an RRSP in Canada. After the age of 71, you can contribute to a spousal RRSP until he/she reaches the age limit.
- Contributions can be made up to February 29, 2012.
- Your allowable RRSP contribution for the current year is the lower of:
- 18% of your earned income from the previous year, or
- The maximum annual contribution limit for the taxation year, which is $22,450 for 2011, or
- The remaining limit after any company sponsored pension plan contributions.
- Your contribution limit can be found in the RRSP Deduction Limit Statement of your most recent year’s Notice of Assessment. You can also call Canada Revenue Agency TIPS at (800) 267-6999.
- You have leniency up to $2000 over limit, but you cannot claim the additional amount on your taxes for deduction purposes.
- Unused contribution room can be carried over to years when you have more to add.
- RRSPs are protected from creditors, so if something drastic should happen to your finances, you will have these savings to bridge the gaps.
- The Lifelong Learning Plan allows you to withdraw up to $10,000 per calendar year to pay for post-secondary education or full-time training for you or your spouse; the amount borrowed must be paid back in no less than 10 years at a rate of 10% per calendar year. A maximum borrowed amount of $20,000 is allowed over four years.
Typical advice in the face of converging opinions on what exactly you should be doing with any excess income is to take a good look at your personal financial situation and do what makes sense for you right now. If you are paying more than 18% on a credit card or have outstanding student loans, you should focus on paying debt off as soon as possible. Damage to your credit profile can come back to haunt you so take it seriously and attend to priorities accordingly. One common strategy is to use tax refunds from RRSP contributions to pay down mortgage (or other) debt.
The best option is to stick to your plan and continue to save, wherever you can. Consolidating debt is a good start towards managing personal finances and refinancing the equity in your home can help. Saving for retirement is your responsibility but there are many tools available to help you determine what it should look like for you.
They must often change, who would be constant in happiness or wisdom. ~Confucius