Retirement is something that everyone has to think about at one point of their lives. However, many fail to realize what is needed in order to retire and live comfortably. Many people do not even realize that the government only provides a small percentage of an individual’s retirement income. That percentage is usually just about 30 percent. If an individual is fortunate enough to have a pension plan, another 30 percent is provided. However, most people have to come up with about 70 percent of their own retirement income. This is usually from their long and short term investments. This is why it is so important to understand how the registered retirement savings plan (RRSP) really works.
The first detail is reducing the amount of income tax that is withheld. This done by contributing money to the RRSP through the employer’s payroll deduction option. This allows the individual to pay less income tax throughout the year instead of overpaying and getting a tax refund.
It is very important to know when a yearly contribution can be made to a RRSP. Most people are not aware that this can be done on the first day of the year, any year. Most wait until they have been informed of what their annual contribution limit is. Typically this information is not provided until the second week of February or first week of March.
However, it does not actually work that way. If a contribution is made that exceeds the annual limit, the individual will not notified. Those additional funds will either be returned or held for contribution the following year. It is necessary to know that the unused funds do not have to be returned. They can be carried into a future year’s contribution.
There are many different eligible investment options for an RRSP. These include investment certificates, shares on the Canadian stock exchange, government bonds, and corporate bonds. An individual can also invest in Canadian based mutual funds as long as they meet specific guidelines set by the government.
The last thing to know is that when it comes to couples, a person can contribute directly to their husband or wife’s RRSP. They can do this as long as the couple does not exceed the annual contribution limit. When the owner of the RRSP reaches retirement age and has to convert the RRSP into a maturity option, many people do not know that the RRSP can be put in the younger spouse’s name, but it can.
If a registered retirement savings plan is an option, the above details should be considered when making the final decision. With this information, an individual should be able to make wise investment decisions. Although it may seem a little early to be thinking about retirement, the fact of the matter is that it is never too early to start planning for a comfortable retirement.
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