Living in Canada - Types of RRSP
Living in Canada retirement savings can come in the form of an Registered Retirement Savings Plan or RRSP. Your contribution to an RRSP reduces your taxable income. When it's time to retire and you withdraw the fees is the time when the money is taxed. Your RRSP contribution limit is based on a percentage of your annual income.
The tax benefits are a great reason to set up an RRSP to help with your long term savings. Depending on how much you contribute, you can get a tax refund every year.
There are many different types of RRSP accounts that you can set up depending on your risk tolerance and retirement plans.
1. Savings Account
If you do not want to take any risk and are unfamiliar with investments or banking products, you may wish to just put aside the money in a low interest savings account.
2. Guaranteed Inventment Certificate (GIC)
A guaranteed investment certificate will guarantee 100% of your capital. This is another low risk option. It locks in the money for specific terms and the bank will provide you with a fixed rate. There are GICs for as short as 30 days and for as long as 5 years. You want to examine the interest rates to make sure they are competitive.
3. Mutual Funds
Mutual funds come in many forms from low risk to high risk. Mutual funds are a portfolio of stocks, bonds, or other investments. You can buy mutual funds that are income fund that are low risk or mutual funds that invest in equity and are high risk. The high risk options have a higher chance of return or loss.
Banks have their financial planners and mutual fund representatives to help you but I strongly believe that everyone needs to learn the basics and do their homework before you blindly invest your RRSP in mutual funds. You want to be able to choose a mutual fund that meets your tolerance level.
You can check out the Morning Star ratings for Canadian mutual funds.
5. Stocks
Stocks are shares of a company that you can buy. These are for advanced investors who need to know what they are buying and have a lump sum of money to be able to purchase a group of stocks. You buy the stocks at a price and as you watch the market, you will want to sell the stocks at a higher price.