How to save for retirement

There are many vehicles to help you save for retirement. 

Registered Retirement Savings Plans (RRSPs) allow for tax-deferred growth until funds are withdrawn.

A Tax Free Savings Account (TFSA) is a registered account that earns investment income tax free inside the account. 

Non-registered Funds are a useful tool in saving for retirement.

An Individual Pension Plan (IPP) is a maximum defined benefit plan for individuals who would like to increase their retirement savings outside of their RRSP. 

An employer pension plan allows both the employer and employee to contribute money to a fund during employment in order to receive defined benefits upon retirement. 



In simple terms, a Registered Retirement Savings Plan (RRSP) is a savings account that allows for tax-deferred growth until funds are withdrawn.

An RRSP also allows you to defer paying taxes on the growth of your retirement savings during your prime income earning years. So, while your investments are in an RRSP, they grow tax free. When you make a contribution to your RRSP, you get a tax deduction for the amount contributed. The deduction reduces taxable income, so the higher your marginal tax rate, the greater the tax savings will be. Upon retirement, you will draw from your RRSP when you are presumably in a lower tax bracket. 

Your allowable RRSP contribution is the lower of:

  • 18% of your earned income from the previous year; or
  • The maximum annual contribution limit for the taxation year

You can make contributions to your own RRSP until December 31 of the year you turn 71, at which time you must turn the RRSP to a RRIF.

Spousal RRSP

With a spousal RRSP, the higher-income spouse can make a contribution to the partner's RRSP, which will be deducted from the contributor's contribution room.

The contributing partner gets the tax deduction. When money is withdrawn from the spousal RRSP in the future, it is taxed at the owner's rate. 

After age 71, you can no longer contribute to your own RRSP but you can contribute to your partner's registered plan, as long as he or she is younger than 71 and you have available contribution room.

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Non-Registered Fund

It is generally more tax-effective to generate retirement income from your personal or non-RRSP savings and investments first– thus allowing your RRSP savings to remain tax-sheltered for as long as possible. Personal savings/investments are most often in the form of:

  • Bonds
  • Pooled funds
  • Term deposits
  • Stocks
  • Mutual funds
  • Real estate
  • Segregated funds
  • A business

For many of us, this will amount to more money than we have in our RRSP or RRIF.

Accumulate, Maintain or Deplete?

Whereas your RRSP savings must be used to produce income after you reach age 71, your non-RRSP savings can be used in any number of ways, depending upon whether your objectives are to:

  • Build up these savings and leave a larger estate; or
  • Leave your current savings/investments to your estate but live on the investment income they generate during your remaining lifetime; or
  • Spend all your accumulated savings over your remaining lifetime.

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An Individual Pension Plan (IPP) is a maximum defined benefit plan for individuals who would like to increase their retirement savings outside of their RRSP. The prime candidates for an IPP are usually profitable corporations that are looking for additional retirement savings opportunities for owners or executives.  An IPP is ideal for business owners, incorporated professionals and highly-paid executives provided they meet certain age and income criteria.
A few of the key benefits of an IPP are as follows:

  • Ability for the company to make a significant tax-deductible lump-sum contribution to the pension plan in the year the plan is established
  • Significantly higher annual contribution limits than RRSPs, which are also tax deductible to the corporation
  • Broad range of investment options
  • Tax-deferred growth of investment income within the plan
  • Creditor protection

If you are over the age of 50 and are an owner/employee of a corporation or a corporate executive, establishing an Individual Pension Plan may allow you to maximize your retirement nest egg in a tax efficient manner.

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Employer-Sponsored Pension

Employer-sponsored pension plans may be based on defined contributions or on defined benefits.

• Defined Contribution Plan

A defined contribution plan, or money purchase plan, is very similar to a regular RRSP.  Both the employer and employee contribute to the employee’s pension account and, typically, the employee is allowed to make some decisions on various investment options. This way, the employee participates not only in the upside, but also the downside of any investment risk for monies that may be in the market.

• Defined Benefit Plan

A defined benefit plan is a pension in which the retirement income benefit is calculated based upon years of service and salary level.  You will have the option at retirement of choosing a single life (payable for your lifetime) or joint life (payable for your life and the life of your spouse) pension (annuity).  As noted above, the employee is entitled to a certain monthly income upon retirement.  Therefore, the company bears all of the investment risk.

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Investing in a Tax Free Savings Account (TFSA) is a tax effective way to help build retirement savings.  A TFSA is a registered account that allows Canadians over the age of 18 to set money aside in eligible savings vehicles and earn investment income tax free inside the account throughout their lifetimes.  While TFSA contributions are not deductible, growth is tax free, as are any withdrawals.

You could contribute an amount up to your contribution room for the year, which is made up of 3 amounts:

  1. Currently, you are allowed to contribute at least $5,500 (annual amount will be indexed to inflation and rounded to the nearest $500 on a yearly basis).
  2. Withdrawals made from your TFSA in the year will only be added back to your TFSA contribution room at the beginning of the following year.
  3. Any unused contribution room from previous years can be carried forward.
  4. All TFSA contributions made during the year, including the replacement or re-contribution of withdrawals made from a TFSA, will count against your contribution room.

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