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RRSP

RRSP’s are a well known type of investment. In brief, save today, so that you can live tomorrow. That’s right, RRSP’s are a retirement investment vehicle. Every year you are allowed to contribute into your RRSP’s, and your RRSP limit is based on 18% of your earned income from the previous year + any unused contribution room from previous years. For the 2017 year, the maximum increase in your RRSP limit is the lower of 18% of your earned revenue from the previous year, or $26,010, whichever is lower.

The great things about contributing into your RRSP’s is that in the year that you contribute, the government will reimburse you a certain percentage of your RRSP contribution, which is based on the tax bracket that you fall into for that particular contribution year. That’s right, contributions to your RRSP’s are tax deductible, and also tax sheltered until you decide to start withdrawing your RRSP’s. So basically the income tax return that you get from contributing into your RRSP’s is free money for the time being. Later on when you reach retirement and you decide to withdraw your RRSP’s, you then need to pay taxes on the withdrawn portion, which is once again based on your tax bracket at the time of withdrawal, which in retirement usually your tax bracket is less than when you were working.. So the key is, invest when you are in your highest earning years and withdraw when you are retired and in your lowest income earning years.

By now you have an idea of what makes RRSP’s an interesting investment. You have also seen some special advantages that are not applicable to TFSA’s. Because of these advantages TFSA’s, aren’t as liquid as TFSA’s are as you have to pay taxes when you withdraw from your RRSP account. However, there are a couple exceptions to this rule:

Home Buyers Plan (HBP)

This plan allows you to withdraw your RRSP’s for the purchase of your first home tax free. How this works, is that you are allowed to withdraw up to $25,000 as a first time homebuyer – meaning that you currently don’t own a home, and haven’t owned a home in the last 4 years.

If this is the case, you are then eligible to use your RRSP’s in order to buy a property in Canada. This means you can purchase a house, condo, duplex, triplex, fourplex whether it be an existing home or new construction.

Once you withdraw up to the $25,000 limit, you must make sure that you return the money into your RRSP account within 15 years, therefore you would need to put back 1 / 15th per year so that you remain on schedule.

Lifelong Learning Plan (LLP)

If you are a full time student, and registered in a qualifying educational program, you can then withdraw your RRSP’s tax free just like the Home Buyers Plan. In fact, even if you have already participated in the HBP, and have not fully repaid your RRSP’s, you can also participate in the Lifelong Learning Plan.

The plans allows you to withdraw a maximum of $10,000 in RRSP’s per year until a maximum of $20,000. Both yourself and spouse or common law partner can participate in the program individually or you can even participate for each other. Once the repayment period begins, you then have 10 years in order to repay your total withdrawal. Therefore you would have to pay this down on schedule of 1 / 10th per year. Once you have paid back your RRSP’s, and have brought your LLP balance to zero, if you are still a full time student, you can then borrow the money out of your RRSP’s in the LLP all over again.

Keep in mind that as long as you qualify for the LLP, there is no specific use that the government requires for that money, meaning you can spend it on anything. You can even use your LLP in order to put a down-payment on a house if you choose.

Types of RRSP investments

Most people are familiar with the big banks, and always turn to the big banks in order to invest. You can play it safe an invest your RRSP’s in GIC’s through the banks, however, since these are your RRSP’s, you will want maximum growth out of them so that you can have a hefty retirement savings built up.

You can also invest your RRSP’s within mutual funds, which is a popular option, however, mutual funds don’t come with the same perks and benefits as segregated funds.

The next type of investment is RRSP’s through insurance contracts, otherwise known as segregated funds. This type of investment allows you to invest in different equities, in order to garnish a greater return on investment. With reset values in place, a certain percentage of your initial investment is guaranteed, which is usually around 70% depending on the insurance company you choose to do business with.

People are living longer lives, therefore it is extremely important that you invest in the proper type of RRSP, that will garnish you nice returns and build up your future retirement fund, so that you may retire comfortably. There are many different options when it comes time to investments, and the whole process could be a bit overwhelming. However, with the right specialist, the whole process becomes clear. Contact Team Levine for your financial clarity!

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