We take a look at the various plans to answer this essential question.
When novice investors start thinking about the future, one of the first questions they ask is which is the best retirement plan in Canada? Unfortunately, there’s no single plan in Canada that will fully fund your retirement years, but there are quite a few different options available to you. When you combine all of these elements together, you end up with multiple streams of income, which will hopefully provide you with enough money to fund your lifestyle during your retirement years.
The thought of different retirement plans may seem intimidating, but as you’ll quickly find out, things can be surprisingly easy to understand once you take the time to read about them. Here are some of the best retirement plans in Canada and how they fit with you.
RRSP – Registered Retirement Savings Plan
Introduced in 1957, the Registered Retirement Savings Plan (RRSP) is the retirement plan that most Canadians are familiar with. Despite the name, an RRSP is actually an account that can hold different investment assets such as stocks, bonds, mutual funds, exchange traded funds, and more. What makes RRSPs appealing is that your contributions are deductible from your income. You’re essentially lowering the income tax payable during the year you’re making a claim which often results in a tax refund after you’ve filed your taxes.
Any income or capital gains you earn within your RRSP are not taxed; however, when you withdraw from your RRSP in your retirement years, it’s seen as income and is taxed according to your marginal tax rate.
With RRSPs, there’s no minimum age limit, but you only earn contribution room after you’ve had employment income and have filed a tax return. Your contribution room is 18% of your previous year’s income. If you have a workplace pension, you would have a pension adjustment which would lower the amount of contribution room you have available.
Once you turn 71, your RRSP must be collapsed and converted into a registered retirement income fund (RRIF).
TFSA – Tax-Free Savings Account
Similar to RRSPs, Tax-Free Savings Account (TFSA) is an investment vehicle that allows you to hold various investments such as stocks, bonds, exchange-traded funds, mutual funds, etc., but your TFSA has a few different rules.
You don’t get a tax break on any of your contributions to your TFSA, but any income, capital gains, or dividends are completely tax-free when you withdraw your money.
You must be a Canadian resident and at least 18 years of age to open a TFSA. How much money you can deposit to your TFSA is based on your current annual TFSA contribution room, plus any unused contribution room you have from the previous years. Since TFSAs were introduced in 2009, your contribution room only goes back to that date. Assuming you were 18 in 2009, you would have a total of $57,500 in contribution room in 2018 if you haven’t made any deposits to date.
You can withdraw your money at any time, but how much you can contribute back depends on how room you have available. For example, let’s say you have $10,000 in contribution room available for the current calendar year, you can’t exceed that amount. You can deposit $10,000 in January and withdraw $2,000 in May in or at any other time. But you wouldn’t be able to re-contribute that $2,000 you withdrew until the following year.
Keep in mind that you don’t lose contribution room. Any unused contributions get carried forward and that also includes any withdrawals. For example, if you withdrew $5,000 in December, you would get that $5,000 contribution room back in January, plus whatever the annual contribution room is for the New Year.
Many people wonder what’s better: a TFSA or RRSP? There’s no simple answer to that since it depends on so many different variables. The good thing is, you may have access to both so you don’t need to stick with just one.
Whether you opt to channel your funds into a TFSA or RRSP (or both), Tangerine is one of the best to bank with in Canada, because they don’t impose any minimum balances, fees, or service charges whatsoever. The Tangerine TFSA accrues interest at 1.25%, and right now, when you become a new client by April 30, 2019 and open your first Tangerine Savings Account, TFSA or RSP Savings Account, you could earn 3.00% interest for 6 months. Add in Tangerine’s absence of fees, surcharges and minimums, and your savings will really accumulate quickly.
As mentioned, your RRSP and TFSA are strictly investment vehicles which you can use to invest in various assets. But how do you actually invest and come up with the best retirement plan in Canada? That’s not an easy question to answer since all plans are different and how you should invest your money depends on a few various factors such as your timeline and risk tolerance.
If the idea of managing your own money does not appeal to you, there is an easy solution – robo-advisors. When you work with a robo-advisor, your plan is chosen for you after you answer a series of questions. The idea is that this short survey will help you determine your goals and you’ll then be recommended a certain plan/portfolio. There are many different robo-advisors out there such as WealthSimple, BMO Smartfolio or Modern Advisor who all provide excellent plans at a low cost. This is appealing to some people since their portfolios are automatically rebalanced by the robo-advisors. There’s no work on their end. Plus, they offer lower fees than a bank or brokerage (check out our handy chart below).
|ROBO-ADVISORS COMPARISON CHART|
|Online Investing Platform||Recommended for||Fee Structure||Account minimum||Apply|
|Wealthsimple Review||Novice investors||· 0.50% up to $100K|
· 0.40% above $100K
· + ~0.2 ETF MER
|BMO SmartFolio Review||Large portfolios||0.40% - 0.70%|
· Average MER = 0.24% (ranges from 0.20% to 0.35% of the value of SmartFolio account)
|Questwealth Portfolios||Novice investors||For balances between $1,000 – $100,000: 0.25%|
For balances $100,001 and above: 0.20%
Average MER = 0.19% (ranges from 0.17% to 0.22% of portfolio value)
|Nest Wealth Review||Large portfolios||· $20/mo under $75K|
· $40/mo up to $150K
· $80/mo above $150K
· + $100 trading fees
· + average ~0.13% ETF MER
|Just Wealth Review||Novice investors||· 0.50% for every $500,000 invested|
· 0.40% for more than $500,000 invested
· $4.99/month fee for accounts under $25,000
· Average MER = 0.25%
|Modern Advisor Review||Novice investors||· Free up to $10K|
· 0.50% up to $100K
· 0.40% up to $500K
· 0.35% above $500K
· + ~0.25% ETF MER
|WealthBar Review||Personalized financial planning||· 0.6% on first $150K|
· 0.4% on next $350K
· 0.35% above $500K
· +average of 0.32% MER (ranges from 0.26% - 0.34% ETF MER)
|Planswell Review||Financial Planning||· 0.5% up to $99,999|
· 0.4% above $100K
· +average ~0.20% ETF MER
|*Funds in account won’t be invested until account balance reaches $1,000.|
- Wealthsimple – no management fees for a year on the first $10,000 of investments
- BMO Smartfolio – You are eligible for $15,000 managed for free for one year with BMO Smartfolio
- Modern Advisor – $50,000 managed for free for 1 year when you open and fund a new account
Now, if DIY investing is of interest to you, you could create your own retirement investment plan or replicate some of the plans that robo-advisors have. All you really need to do is set up an account with an online brokerage (which is really easy to do) and then make the trades on your own. Although you do have to pay for some of your transactions, your overall management expense ratio would likely be lower than robo-advisors.
CPP – Canada Pension Plan
The Canada Pension Plan is Canada's public retirement income system designed to provide monthly income for retirees. The plan is funded by Canadian employees as well as their employers. It operates in all of Canada with the exception of Quebec, where the Quebec Pension Plan takes its place. How much you get paid on a monthly basis when you retire varies depending on a variety of factors, but the average payouts in 2018 are as follows:
- Retirement pension (at age 65) – $673.10
- Post-retirement benefit (at age 65) – $10.35
- Disability benefit – $961.43
- Survivor's pension – under age 65 – $424.15
- Survivor's pension – 65 and older – $311.59
- Children of disabled CPP contributors – $244.64
- Children of deceased CPP contributors – $244.64
- Death benefit (one-time payment) – $2,300.97
- Combined survivor's and retirement pension (at age 65) – $862.50
- Combined survivor's pension and disability benefit – $1,073.51
As Canada’s population ages and more Canadians retire, some people are concerned that the CPP monthly payments will be clawed back in the future, but that’s where the Canada Pension Plan Investment Board (CPPIB) comes into play.
The CPPIB is one of the world's biggest pension funds with nearly $400 billion under their management. The CPPIB uses a long-term, sustainable, and well-diversified investment strategy which will be able to stand up against any financial crisis and provide stable retirement income for generations to come.
Since CPP contributions are usually done automatically through payroll deductions, many Canadians don’t even realize that the CPPIB is actively managing the investment of the fund on their behalf.
While the CPP is designed to replace 25% of your lifetime income, it is not meant to be your sole pension. You would still need other sources of income for the lifestyle you want during your retirement years.
OAS – Old Age Security
Old Age Security (OAS) is another Government of Canada pension program that is available to seniors 65 or older who have legal Canadian status and meet the residency requirement. To get your pension payout, you must apply to Employment and Social Development Canada (ESDC).
In addition to OAS, you may also qualify for additional benefits such as Guaranteed Income Supplement, Allowance, and Allowance for the Survivor.
The payouts you get through OAS are not as high as CPP, but you would get both assuming you meet all the requirements. How much you get paid per month by OAS depends on how long you lived in Canada after you turned 18, your marital status, and level of income when retired. In 2018, the payouts per month were as follows:
- Regardless of your marital status – $600.85
- If you are a single, widowed or divorced pensioner – $897.42
- If your spouse/common-law partner receives the full OAS pension – $540.23
- If your spouse/common-law partner does not receive an OAS pension – $897.42
- If your spouse/common-law partner receives the Allowance – $540.23
Even if you don’t qualify for a full pension, you may still be entitled to a partial pension if you’re 65 or older, a Canadian citizen or permanent resident who is currently living in Canada and has lived in Canada for the past 10 years.
As you can see, it’s impossible to answer “Which is the best retirement plan in Canada?” because there is no one plan that gives you everything you need. These retirement plans were designed to complement each other to provide you with multiple streams of income during your retirement years. So plan ahead by spreading out your savings – and you’ll be ready to rock in your golden years!
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