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The Best Retirement Savings Plan in Canada

Canadians today are living longer than ever before. With retirements lasting 25 years or more, it’s critical to have a solid retirement savings plan in place. Finding the best way to save and invest for retirement can be confusing with so many options available. This guide will outline the top retirement savings plans in Canada and help you determine which is the best choice for your needs.

What is the Canada Pension Plan (CPP)?

The Canada Pension Plan (CPP) is one of the main pillars of retirement savings for Canadian workers. It is a mandatory public pension plan that aims to replace about 25% of pre-retirement income. Both employees and employers make contributions to the CPP based on earnings. If you’ve worked in Canada and made at least one CPP contribution, you qualify for CPP benefits in retirement.

The standard CPP retirement pension is available at age 65. You can take a reduced pension as early as age 60 or an increased pension if you defer payments until age 70. The amount you receive depends on your contribution history and when you start collecting. The maximum CPP benefit for 2023 is $1,427 per month. The average retirement pension is around $750 per month.

The CPP provides a secure, predictable lifetime income in retirement. One of the key benefits is that benefits keep pace with inflation each year. Overall, the CPP is an important foundation for retirement savings for most Canadians.

Registered Retirement Savings Plan (RRSP)

The RRSP is a popular retirement savings vehicle that lets Canadians invest on a tax-deferred basis. It works like this:

  • You contribute pre-tax dollars to an RRSP account. This reduces your taxable income for the year.
  • You get an income tax deduction for your contributions.
  • Money grows tax-free within the account over time.
  • You pay income tax when you make withdrawals in retirement.

Some key benefits of RRSPs include:

  • Tax savings – You essentially get an instant tax break on your contributions.
  • Tax-deferred growth – You don’t pay taxes on investment earnings and compound growth until withdrawn.
  • Wide choice of investments – You can hold stocks, bonds, mutual funds, GICs and more in an RRSP.
  • Flexible access – Unlike pensions, you can use RRSP funds for major purchases through the Home Buyers’ Plan and Lifelong Learning Plan.
  • Creditor protection – RRSP funds are generally protected from creditors.

The earlier you start contributing, the more your RRSP can grow thanks to tax-deferred compounding. RRSP contribution room accumulates each year and carries forward if unused. The maximum contribution room for 2023 is $29,210. You can contribute until the end of the year you turn 71.

RRSPs are an excellent way to supplement CPP benefits in retirement. They provide flexibility in how much you can save based on your individual circumstances.

Tax-Free Savings Account (TFSA)

The TFSA is arguably one of the best accounts available for retirement savings and investing. Here’s how it works:

  • You contribute after-tax dollars into a TFSA account. Contributions aren’t tax deductible.
  • Money grows tax-free within the account, and you don’t pay tax on withdrawals.
  • Contribution room accumulates every year, and unused room carries forward.

Some of the key perks of TFSAs:

  • Tax-free growth – Investment income and gains aren’t subject to tax.
  • Flexible withdrawals – You can take money out tax-free at any time for any purpose.
  • No age limit – You can contribute at any age as long as you have contribution room.
  • Wide investment choice – TFSA accounts can hold eligible stocks, mutual funds, ETFs and more.

The standard TFSA contribution limit is $6,500 in 2023. Unused contribution room carries forward each year. The lifetime contribution limit is $88,000 as of 2023 for those who have been eligible since 2009.

TFSAs are a powerful savings tool for retirement. Tax-free growth allows your savings to compound more quickly. The flexibility to withdraw funds without tax makes it easy to supplement retirement income.

Employer Pension Plans

Many employers offer defined benefit or defined contribution pension plans to employees. These workplace plans have tax advantages and may include matching employer contributions.

Defined Benefit Plans

These traditional pensions guarantee a certain level of lifetime retirement income based on your earnings history and years of service. The employer manages the plan and investment risk. Benefits are predictable and secure.

Defined Contribution Plans

The employer and employee contribute to an account over time. The retirement benefit depends on contribution amounts and investment returns. The employee usually makes the investment decisions. The benefit level varies based on market performance.

Workplace pensions often require employee participation. And they have key benefits like:

  • Forced savings – Pension deductions from your pay make saving for retirement automated.
  • Employer contributions – Many employers match a percentage of employee contributions.
  • Professional management – Workplace pensions are professionally invested.
  • Low fees – Large pension pools can access institutional investment options with lower fees.
  • Lifetime income – Most plans offer lifetime retirement income.

If you have the opportunity, participating in an employer pension can significantly boost retirement readiness. Be sure to understand your plan details and benefits package.

Which Is the Best Retirement Savings Plan in Canada?

So which retirement savings plan is right for you? The reality is that utilizing a combination of different plans is the best approach for most Canadians. Here are some guidelines:

  • Max out employer pensions first to get the full company match.
  • Contribute enough to RRSPs to bring your taxable income down to the next lowest tax bracket.
  • Top up your TFSA so you maximize your tax-free savings each year.
  • Rely on CPP as a base layer of secure lifetime retirement income.

Tailor your savings mix and contribution levels to your income, tax situation, expected retirement lifestyle and risk tolerance. Get professional advice from a certified financial planner to develop the optimal retirement plan.

Diversifying across different savings vehicles lets you take advantage of the unique benefits of each. This layered approach helps minimize taxes while maximizing government benefits and overall retirement income.

Tips for Choosing Retirement Savings Accounts

  • Take advantage of employer plans first – Get the full company match and benefits.
  • Start saving early – Give your funds decades to grow.
  • Contribute regularly – Set up automatic deductions to stay on track.
  • Use RRSPs to lower taxable income – Especially in peak earning years.
  • Max out TFSAs – For tax-free savings and flexibility.
  • Invest based on timeline – Use more stocks for long-term goals.
  • Rebalance portfolio – Keep your asset mix aligned with your risk profile.
  • Review plans annually – Adjust contributions as income and plans change.
  • Get professional advice – From a certified financial planner.

The key is developing a tailored retirement savings strategy that makes the most of the plans available to you. Consistency, time in the market, diversification and prudent investing are what count in building a robust retirement fund.

Frequently Asked Questions on Retirement Savings Plans

What is the best retirement savings plan in Canada for low income earners?

The TFSA is likely the best retirement savings vehicle for low income Canadians. Contributions aren't tax deductible but investment gains and withdrawals are tax-free. This allows savings to grow faster. The TFSA has no minimum income requirement like RRSPs and contribution room carries forward each year.

Is it better to invest in RRSPs or TFSAs?

Both RRSPs and TFSAs are great retirement savings options. RRSPs make sense if you need to lower your taxable income. TFSAs are better if you expect your tax rate in retirement to be the same or higher than your current marginal rate. Using both plans allows you to maximize your tax-advantaged savings opportunities.

How do I decide between investing in my company pension plan or an RRSP?

If your employer provides matching pension contributions, prioritize contributing enough to get the full company match since that's free money. Then you can use RRSPs to supplement workplace pension savings and further reduce your taxes.

What percentage of pre-retirement income should Canadians target for retirement?

A general guideline is to target replacing 60-80% of your pre-retirement income to maintain your lifestyle in retirement. This range accounts for expenses that may decrease like commuting costs and taxes. Aim for the higher end if you have a more lavish lifestyle.

Can I have both a TFSA and an RRSP?

Yes, you can and should utilize both a TFSA and an RRSP in your retirement planning. They offer complementary tax advantages so using both allows you to maximize your savings and minimize taxes. Contribute to your TFSA first then top up your RRSP contributions based on your RRSP deduction limit.

What happens to my RRSP/ pension when I die?

The proceeds of your RRSP or pension can be transferred tax-free to a surviving spouse upon death. Alternately, they can be left to a named beneficiary and will be taxed in the beneficiary's hands. Ensure you have updated beneficiary designations so funds transfer smoothly.

When should I start collecting CPP retirement benefits?

The standard age to begin receiving CPP is 65. You can take CPP as early as 60 or delay it until 70. Delaying increases your benefit while taking it early decreases it. The decision depends on factors like your health, other income sources and life expectancy.

How much do I need to save for retirement?

As a general rule, you are estimated to need around 60-80% of your pre-retirement income annually in retirement. So if you make $100,000 before retirement, aim to have $600,000 - $800,000 saved. Use retirement calculators to estimate your target based on your specific details.

What's the best retirement savings plan for self-employed Canadians?

Self-employed Canadians should maximize RRSPs and TFSAs for retirement savings since they likely don't have access to an employer pension. RRSPs allow larger tax-deductible contributions than employees. Opening a self-directed RRSP or TFSA with a discount brokerage unlocks DIY investing options.

What happens if I outlive my retirement savings?

If you live longer than expected and outlive your retirement savings, the CPP and OAS provide secure lifetime income. These government benefits could cover essential living costs in later retirement years. Maintaining some stocks in your portfolio also provides longevity protection. Downsizing your home can free up equity too.