Current Rrsp Contributions example essay topic

First Main Topic: What are RRSP's In simple terms, an RRSP is a tax-deferral plan registered with Revenue Canada. With an RRSP, you can deposit a portion of earned income and claim the contribution as a tax deduction. Not only are the contributions made to an RRSP tax deductible (subject to limitations), but the income generated by the investments inside an RRSP is not taxed untill withdrawn from the plan. This means you can get a much larger investment for your retirement than you could by investing outside an RRSP. When you make an RRSP contribution, you get a tax receipt to be filed with your tax return in order to claim your deduction. If you " re still confused by what exactly an RRSP is, you are not the only one.

This is one of the most difficult concepts for Canadians to get a handle on. A good way to compare an RRSP is with an umbrella. The investments you buy with your RRSP dollars, whether they are guaranteed investment certificates, mutual funds, stocks, bonds or treasury bills. They are all held under this umbrella. And as long as they remain under this RRSP umbrella, they continue to be treated in a very special way. However, if you take these investments or cash out from under the umbrella, if you de register them, they will no longer benefit from this special tax treatment.

RRSP HISTORY RRSP's were created in 1957 by the federal government to encourage Canadians to save for retirement. The motivation to participate was simple, people could defer paying tax on a portion of their current income in order to accumulate money for their retirement. The introduction of RRSP's also ended the existing inequity. Before RRSPs were created, only people who belonged to company-sponsored pension plans could deduct pension contributions from their taxable income. Now, all Canadians under the age of 71 with earned income can actively plan for retirement while deferring tax. After the introduction in 1957, RRSP deposits built slowly Initially, the only people offering RRSPs were the government and insurance companies, followed in the middle to late 1960's by the mutual fund industry.

The banks got into the swim in 1975, and since then the competition for our retirement dollars has grown stronger each year. By 1988, approximately 3.8 million people (more than 20% of Canadian taxpayers) had opened RRSPs, contributing over $10.5 billion, which was a significant growth when you consider that in 1968 less than $175 million had been contributed. The growth has been even more rapid since then. The 1989 figure was somewhere around $30.3 billion. In 1991, total RRSP holdings were approximately $129 billion, up from $110 billion in 1990.

And by the end of the 1992 contribution period (March 1994) it was 1995, 5.7 million Canadians (29% of all tax filer) contributed a record $23 billion to RRSPs, and in 1996 about 6 million people contributed over $26 billion. How much do I need to save to Retire A 40 year old male earns $80,000 a year. He would like to retire on $50,000 a year in today's dollars. He has a good start on his mortgage and knows it is also important to save for retirement. He has already saved $50,000 in his RRSPs. Going to the section called retirement savings, we can start filling out the blanks.

Tom will retire in 25 years. He wants a future income valued at $50,000 in today's dollars. He starts with an inflation assumption of 2%. He uses a rate of return of 5%.

He checks off that he will increase his future savings by the rate of inflation. Whe he presses calculate, it shows that he will need $1,203,000 saved by age 65. In order to accomplish this, he needs to save $1,434 per month and increase his monthly savings by 2% each year. This is more savings than can currently be sheltered under RRSPs, and the amount he needs to save increases each year while current RRSP contributions are frozen at $13,500. Therefore, he will want to look at other tax-favoured investments. Because this software is easy to use, he can see what impact a better rate return, or a different rate inflation would cause.

He can develop a range of scenarios. In the example use, the man would actually have first year income at age 66 of about $82,000 to be worth $50,000 in today's dollars if inflation averages 2%. Retirement planning involves setting aside enough money during one's working years to provide income during retirement. A simple concept, but a complicated activity once investment choices, governments and taxes are taken into account.