As a public servant, you now have the Public Service Superannuation Plan (PSSP) pension program working for you. For many people starting in the public service early in their careers, the PSSP pension program could meet their financial goals for their retirement years. Tradex can help you with your retirement planning from the start. Our advisors are very familiar with the PSSP and can help you build a plan that supplements it.
The chart above outlines the potential growth based on compounding interest for two individuals planning to retire at age 65. Emma began contributing $3,000 annually at age 20 and then stopped at age 35. Benson started contributing $3,000 annually at age 35 and contributed right up until retirement. As the chart shows, Emma gets $988,663 for contributing early, while Benson receives only $399,641, even though he contributed for longer (assuming both obtain 8% annual returns). It’s all about gains – as your initial investments grow and generate gains, those gains become savings and they, in turn, produce additional gains of their own. This is the reason why starting early is important when trying to achieve your financial goals.
Some of the common investments for new members of the public service:
Tax Free Savings Account
The Tax-Free Savings Account (TFSA) label can be somewhat misleading in that this option, or plan, is not restricted to any single type of Investment. You have all of the options Canadians are familiar with for RRSPs (Savings Accounts, GICs, Bonds and Equities) available to you in a Tax Free Savings Account. With the flexibility and tax sheltering features that the TFSA offers, it is the best option for individuals who only have one savings or investment vehicle. With this option, every dollar earned from this investment is kept fully sheltered from taxation.
Tax-Free savings Accounts are a relatively new way to earn investment income tax-free. Beginning in 2009, Canadian residents aver 18 are able to contribute into a TFSA that is not subject to taxes an investment income, including interest or capital gains, earned on this type of account Taxes will not be charged on the money withdrawn from this account. However, contributions made to this account will not be tax deductible.
There is no lifetime Limit to the TFSA, and if you are unable to make the maximum contribution in a particular year, the unused portion is carried forward and you can use it to contribute in future years. Amounts withdrawn from a TFSA will increase the subsequent calendar year’s contribution limit by the same amount.
Registered Retirement Savings Plan
A Registered Retirement Savings Plan (RRSP) is an investment account designed primarily for saving toward your retirement years. As a retirement savings vehicle, regulated by the Canadian government, RRSPs have special tax benefits. Your annual RRSP contribution can greatly reduce the amount of income tax you pay in that year and the money you put away can have years of tax-deferred growth potential You only pay tax on the amounts you withdraw.
Contributions to an RRSP can only be made by individuals with “earned income” taxable in Canada, which includes salaries, self-employment income, maintenance and alimony payments, and net rental income (but does not include income from pensions or investments). Certain other types of income may be eligible – consult a tax advisor or Canada Revenue Agency (CRA).
CRA issues statements to individual taxpayers with their “Notice of Assessment” informing them of their RRSP contribution limit for the following year. It is calculated as 18%, prior gross earned income, less pension adjustments. Each contribution will generate a tax reduction and can be made up to 60 days into the next calendar year.
Income Splitting and Spousal RRSP
The more taxable income you have, the higher your tax bracket. You should, therefore, consider allocating future taxable income as evenly as possible between you and your spouse or common-law partner. This is commonly known as “income-splitting”.
You are entitled to put all or part of any allowable RRSP contribution into an RRSP in the name of your spouse or common-law partner. Generally, the maximum benefit is achieved by using all the contribution room of the spouse with the higher marginal tax rate first. When you both withdraw your RRSP savings during retirement, the combined income tax you pay as a couple may be lower than what you would pay if all your savings were in a single RRSP.
As the contributor to a spousal RRSP, you benefit from the tax deduction while building a retirement nest egg for your spouse or partner. Amounts withdrawn from a spousal RRSP will be considered part of the taxable income of your spouse or partner, to the extent that you have not contributed any amount to a spousal plan in the current year or the two preceding years. A spousal RRSP is most beneficial in a situation where the spouse would otherwise have little retirement income while the contributor would have a significant amount of income.
With the introduction of pension splitting, less care in balancing spousal RRSP to pensions is required as some adjustments can be made on each spouse’s tax return when pension and retirement income is received.
High Yield Savings Account
High interest savings accounts are ideal for short term holdings such as emergency funds or planned expenditures within twelve months as they are not subject to market fluctuations. These accounts may offer several ti mes the return that is provided on major bank accounts. These accounts may also be used in conjunction with an allocation or reallocation to other investments to take advantage of dollar cost averaging.
Guaranteed Investment Certificate
GIC stands for guaranteed investment certificate. When you buy a GIC, you invest a sum of money for a specific period of time. When you cash in your GIC at the end of the specified term, you are guaranteed to receive your full principal investment plus interest You are getting a lower level of risk but you pay for this by having a reduced potential gain.
Term Life Insurance
Tradex can help you get the Level of protection you need and the premium you want by customizing your Term Life Insurance plan’s duration and coverage. As you start your career, the main need for a Term Insurance plan is to protect your dependants by replacing your income contribution to the household, should the need arise. Term Insurance provides an option superior to plans typically offered by lending institutions. A Tradex advisor can go over the available options with you to highlight the benefits of Term Insurance in a no obligation consultation.