Moneywise: Retirement savings options beyond your RRSP

Canadians have been contributing to their Registered Retirement Savings Plans since the popular retirement savings vehicle was started 60 years ago. For those who may have maxed out their contributions, and for others who haven’t, there are a number of other savings options available to help them put aside money for their retirement years.

Recent census data shows that almost two-thirds of Canadian households are saving for their retirement. Thirty five per cent are saving through an RRSP, 30.1 per cent through a registered pension plan, 40.4 per cent through a Tax Free Savings Account (TFSA) and 9.3 per cent through a combination of all three.

The figures show that people in their prime working years between age 35 and 54 are most likely to save in their RRSPs. This is probably due to the fact that their income is high enough that they can take good advantage of the tax deduction that comes from investing in an RRSP.

However, the numbers also show that the TFSA, introduced in 2009, is becoming increasingly popular, with more than 40 per cent of Canadians contributing to them. The TFSA was a more popular savings vehicle than the RRSP with Canadians in the 15-24, 25-34, 55-70 and 71 and over age categories.

The TFSA has some distinct advantages to an RRSP. It is great for people just starting out on their careers and for those who expect to have a significant increase in their salaries in the future. You can put money in and grow it, pull it out without tax and put in into your RRSP when your salary increases to get the tax deduction, and then put the money back in at a later date.

As well, since withdrawals from a TFSA are not taxed they won’t result in Old Age Security payments being clawed back at tax time.

“The TFSA is a very flexible and effective way to save for both short- and long-term goals,” says Robin Cooke, a financial adviser with Edward Jones in Bolton, ON. “However, it’s a bit of a shock to see the results of some studies which have shown that a lot of people don’t know that you can invest in most investment products like stocks and bonds, GICs, ETFs and mutual funds in their TFSA. I think this is a terminology issue – the word savings in the name.”

Cooke says investing in dividend paying stocks in a non-registered investment account also is a good idea because the capital gains are not taxed until the stock is sold and dividends are one of the most tax-efficient sources of income.

Direct investment in real estate is another option, either through a principal residence or through rental property. Gains made in the value of your principal residence are not taxed and rental property can be the source of income in retirement.

“Rental property can have its pros and cons and real estate is not as liquid as some other investments, but it certainly is a viable option,” Cooke says. “It will depend on how much of your wealth is in it. It’s always a good idea to be diversified.”

Another option is a family trust. A trust is a vehicle for holding, and passing on, family property. It typically serves at least one of two purposes: It can reduce a family’s taxes by shifting income to members in lower tax brackets and it can provide for family members by controlling how their money is disbursed. “These have to be looked at on a case-by-case basis because you need a certain level of wealth and income for them to make sense, and there are costs tied to them,” says Cooke.

Insurance is another way to effectively preserve wealth and then pass it on.

While the census data shows that two thirds of Canadians are saving for their retirement, this would mean that one third are not.

“A lot of people are hesitant to open up about their finances and seek advice,” says Cooke. “It’s important to talk to a professional about your personal situation and goals to make sure the options you choose are right for you.”

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.

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