How to Save for Retirement in Canada

The Canada Pension Plan (CPP) is the flagship retirement saving plan operated by the Canadian government. It is a contributory, earnings-related social insurance program, and you must make regular contributions during your working years to be eligible.

Applicants must have worked and made valid contributions to the CPP for at least four of the last six years, or they must have contributed for at least 25 years in their lifetime. Both you and your employer will contribute to the fund, and the contribution rate is reviewed annually. If you are self-employed, you must contribute as both the employer and the employee.

You typically start getting benefits from the CPP at 65, but you can do so as early as 60 or as late as 70. The amount of CPP benefits is based on the individual's earnings, on which contributions were made, and the age when they started receiving the payout.

Old Age Security is a Canadian government program that provides a basic pension to individuals over 65 as long as they have lived in Canada for 40 years after turning 18. If you haven’t been a resident of Canada for 40 years, you may still be eligible for partial benefits.

Remember that OAS benefits are subject to income testing, and high-income individuals may experience a clawback in the form of an OAS Recovery Tax. This tax is triggered when your net income exceeds a specified threshold, which changes yearly and was $81,761 in 2022. To effectively plan for the clawback, you must know their overall income, including sources like pensions, employment income, and investment returns.

The Guaranteed Income Supplement (GIS) is a key component of Canada's Old Age Security program, designed to provide additional financial support to low-income seniors. Eligible individuals who receive the Old Age Security (OAS) pension and have a modest income may qualify for GIS. The supplement is income-tested, meaning the amount received is contingent on the recipient's financial situation. GIS aims to enhance the financial well-being of seniors by offering a monthly non-taxable benefit. Its implementation reflects the government's commitment to addressing economic challenges faced by seniors with limited income, ensuring a more secure and dignified retirement for those who require additional assistance.

Registered Pension Plans (RPPs) are employer-sponsored retirement savings programs designed to provide employees with a stable income in retirement. There are two types of RPPs: defined benefit (DB) or defined contribution (DC) plans. In DB plans, you get a guaranteed benefit amount depending on your years of service and salary. In DC plans, you make specific contributions in individual accounts, but the benefit amount depends upon their investment performance.

Typically, the employer and the employee contribute to an RPP, and the amount is usually a percentage of the employee’s annual salary. Usually, employee contributions are deducted from the paycheque, so contributing to an RPP is hassle-free and convenient.

Group Registered Retirement Savings Plans (Group RRSPs) are employer-sponsored savings plans that allow employees to contribute to their retirement savings on a tax-deferred basis. These saving plans come in the form of investment options in a wide range from stocks to mutual funds according to the employee’s risk tolerance. RRSPs are collective plans for several employers of the same company, making it easy for the employer to negotiate low investment management fees.

Contributions made to Group RRSPs are deducted from employees' taxable income, reducing their current tax liability. The money in an RRSP will not be subject to any tax until they withdraw it. The investment can generate significant profit without any of it getting taxed yearly. Instead, you’ll pay a one-time tax when you withdraw the money.

A Registered Retirement Savings Plan (RRSP) is a tax-deductible retirement account plan, so it reduces your taxable income for the year you make the contribution. RRSPs are many individuals' standard retirement saving options. Many individuals hold precious metals, such as gold, silver, or platinum, in their RRSPs, as they provide a hedge against inflation, keeping their value intact over decades. However, as this article by Oxford Gold Group explains, you don’t physically possess the gold in your retirement funds, be it an IRA or RRSP, or other similar retirement plans. 

RRSPs are considered favorable because of their tax benefits. While contributions are tax-deductible, any income earned within the RRSP is not taxed until withdrawn. This allows for tax-deferred growth. Withdrawals from an RRSP are taxed as income and are subject to withholding taxes. However, the purpose of the RRSP is to encourage long-term savings for retirement, so there are penalties for withdrawing funds before retirement.

Tax-free savings accounts (TFSAs) are a popular individual retirement saving option. They have annual contribution limits set by the government. In a TFSA, the contribution room accumulates every year, and if you have an unused contribution room, you can carry it forward indefinitely. The contribution limit is the same for all eligible individuals, regardless of income.

This savings account is considered tax-free, as you contribute to it with your after-tax income and don’t pay any tax when you withdraw your money. TFSA withdrawals also do not affect eligibility for government benefits or tax credits. TFSA accounts are also very flexible, allowing individuals to use the funds for various purposes without penalties. This makes them a good candidate for both short-term saving goals and long-term goals like retirement. Investment options in TFSAs are similar to RRSPs, providing individuals with the flexibility to invest in various asset classes.