The days of hiding your savings under the mattress are gone. Nowadays, one of the best ways to grow your money is to invest it. But there are lots of options to choose from and it's easy to get overwhelmed. So, where should you start?
RRSPs, perfect for planning your retirement
If you want to save for retirement while paying less tax, a registered retirement savings plan (RRSP) is the right type of investment for you. Each year, you can invest up to 18% of your income from the previous year. However, this amount must not exceed the annual contribution limit set by the government. Unable to make the maximum allowable contribution in a given year? Don't worry! You can carry forward any unused contribution room for future years.
It's almost never too late to invest in an RRSP. You have until December 31 of the year you turn 71 to do so. Of course, it's best to start as early as possible to earn interest for longer.
Have an unforeseen expense? You may be able to withdraw some of the funds in your RRSP. But be careful, because you will have to pay tax on this amount, except in specific cases such as buying your first home or going back to school full time.
The Fonds de solidarité FTQ, ideal for paying less tax
Is paying less tax your top priority? Then it might be a good idea to invest in the Fonds de solidarité FTQ's RRSP . Unlike a regular RRSP, an RRSP gives you an additional 30% in tax savings on the first $5,000 you invest. It may be worth it if you're self-employed or have a high income.
That said, the main purpose of an RRSP is to save for retirement. As with a regular RRSP, you can still withdraw a portion of the funds invested before you turn 65 for things such as buying your first home or going back to school full time.
In recent years, the Fonds de solidarité FTQ has performed well, but it's important to remember that the funds you invest in it are not guaranteed. If you are anxious or cautious by nature, that's something you need to consider.
The LLP, help for going back to school
Thinking of going back to school full time, but can't afford it? Have you considered the Lifelong Learning Plan (LLP)? This program lets you withdraw up to $20,000 from your RRSP ($10,000 per calendar year) to finance your full-time training or education.
The LLP also lets you finance full-time training or education for your spouse or common-law partner, but not for your children. You should use another program for them, such as an RESP.
Keep in mind, however, that when you withdraw funds from your RRSP through the LLP, you will have to repay them, typically within 10 years. Otherwise, you'll have to pay tax on the amount. So be sure to carefully plan your repayment schedule to avoid any nasty surprises with the CRA down the road.
RESPs, investing in your children's future
If you have young children and want to save for their post-secondary education, an RESP may be right for you. You can contribute up to $50,000.
There are two advantages to an RESP. First, the money you contribute will grow tax-free. Second, you can get federal and provincial government grants to increase your investment amount.
Once your children enrol in a post-secondary program, you can withdraw some or all of the funds accumulated in your RESP, with the exception of grants and accrued interest. These are subject to an annual limit set by law. For instance, for the first 13 weeks in a post-secondary program, you cannot withdraw more than $5,000.
If your children do not attend CEGEP or university, you will have to pay tax on the accrued interest and repay the grants you received. However, the money you contributed will not be lost.
You also won't lose your money if you withdraw some or all of the funds contributed to an RESP before your children start school. Normally, you can do it at almost any time, but you have to give the grants back to the government.
Ethical investing, values-based investing
Are you familiar with ethical investing? These are investments that take into account not only the net income of a company, but also environmental, social, and governance (ESG) criteria.
Through its operations, does a company pollute or contribute to global warming? How does it manage its waste and water? Does it protect habitats? These are all examples of environmental criteria.
Social criteria include business–community relations and employee relations. For example, a company that maintains poor working conditions, uses child labour, or discriminates would lose points.
Governance criteria include the relationship between company directors and shareholders, executive compensation, and anti-corruption rules.
With ethical investing, you can invest your money in companies that share your values. But does it pay? According to the experts, ethical funds can perform just as well as traditional investments—often even better.
Whether you want to plan your retirement, go back to school, or invest in your children's future, there's an investment that's right for you. But before you invest in anything, always read the prospectus to make sure the product meets your needs.
- An RRSP is the perfect tool to grow your savings tax-free as you plan for retirement.
- Even though it's not guaranteed, the Fonds de solidarité FTQ's RRSP provides significant tax savings while you plan for retirement.
- The LLP lets you finance going back to school full time through your RRSP.
- An RESP lets you save for your children's post-secondary education and receive government funding.
- Ethical investing lets you invest in companies that share your values.