Investing for retirement can be somewhat complex. Fortunately, there are plans available that allow you to schedule small amounts of money over time which you can reap in the future. According to Rothenberg Capital Management here are the few most common employee retirement plans.
REGISTERED RETIREMENT SAVINGS PLAN (RRSP)
A Registered Retirement Savings Plan (RRSP) is a special type of financial account in Canada designed for holding savings and investment assets. They were originally introduced in 1957 as a means to promote long term savings and retirement for employees and for those who are self-employed. An RRSP carries with it several tax advantages, which is why it is so attractive to investors.
A proper and effective RRSP must comply with a variety of restrictions that have been stipulated within the Canadian Income Tax Act. This Act approves assets for an RRSP to include:
- savings accounts
- guaranteed investment certificates
- mortgage loans
- income trusts
- foreign currency
- labour-sponsored trusts
- mutual funds
- and corporate shares
Various rules will determine the maximum contribution allowed as well as other variables like the timing of these contributions, the assets you are allowed to contribute, and the overall eventual conversion of the account to a Registered Retirement Income Fund (RRIF) at the age of 71.
TAX-FREE SAVINGS ACCOUNT (TFSA)
A Tax-Free Savings Account (TFSA) is a special type of account which, simply put, provides tax benefits related for the purpose of savings. Basically, you would set up an account like this if you have investment income—like capital gains, interests and dividends—which can then avoid taxation, even when withdrawn. However, because deposits in these accounts are not traditionally taxed, they are also not deductible in terms of income tax, unlike contributions which could be made to an RRSP.
But while the TFSA and the RRSP are different in that way, they are similar in that they do not have to be a cash savings account. Both of these account types can contain cash, of course, as well as various other types of investment earnings like mutual funds, bonds, guaranteed investment certificates, and stocks. More specifically TFSAs can also hold any investment eligible for RRSP.
The TFSA is also similar to the RRSP in that they both have annual contribution limits, which can change year to year.
A pension plan is yet another type of retirement account offered through some employers. Basically there are two types of pension plans:
- Defined Benefit Plan: employer guarantees the employ will receive a specified amount of this benefit when the employee reaches retirement; this is regardless of the performance of the investment pool containing it.
- Defined Contribution Plan: employer will make predetermined contributions into the account for the employee; however, the final amount received by the employee at retirement will, in fact, depend on the performance of the investment.
There are several other similar types of employer-matched, defined-contribution pensions plans and each offer the same base benefit but carry different restrictions or stipulations.