The Registered Retirement Savings Plan (RRSP) in Canada is an account that’s close to the hearts of retirees. You can hold investments such as cash, stocks, and other interest-bearing or dividend-paying financial instruments in your RRSP.
As an RRSP account holder, you receive several advantages, particularly on the tax component. Your contributions are tax deductible, and your earnings are tax sheltered for as long as they stay in the RRSP. Also, you have the option to defer your tax liability to the future for a lower marginal tax rate upon retirement.
Here are three must-know features of RRSP investing.
Contribution amount
If you’re an income tax filer, you can contribute 18% of your earned income in the previous year or the maximum contribution amount for the current tax year, whichever is lower. In case you have insufficient funds to contribute in a year, you can always carry forward your RRSP contribution room and use it in the future.
RRSP validity period
Income earners at any age can open an RRSP account in preparation for retirement. However, upon reaching age 71, you must close your RRSP. By then, you can withdraw your RRSP savings in cash or convert it to a Registered Retirement Income Fund (RRIF) depending on how you deem fit.
Qualified investments
Many retirement planners and income seekers invest in dividend stocks because of higher returns compared with fixed-income financial instruments. There are no prohibitions to investing in foreign stocks if you so desire. But you have to consider the tax implications, because it will eat up on your net profit or gains.
If you hold foreign stocks in your RRSP, taxes due on all earnings or income from the stock will be treated as regular income. Upon withdrawal, you pay the corresponding tax due. Likewise, the country of origin may impose non-recoverable taxes.
The best advice when doing RRSP investing is to purchase quality TSX stocks. Enbridge (TSX:ENB)(NYSE:ENB) is an example of a stock suited for Canadian retirees. The features of this energy stock match the unique benefits of the RRSP.
Enbridge is one of the select companies that can provide cash flows for retirees and someone who is about to retire. This $93 billion oil and gas midstream company currently offers a high 6.5% dividend and pays it every quarter.
The company has so much potential for growth in the foreseeable future. It will enable Enbridge to produce stable revenue streams and reward retirees with income in the years ahead. Management sees average annual growth of 8.14% in the next five years.
Industry “moat”
Enbridge is presently benefiting from the boom in the natural gas business in North America. The company completed various projects in the last decades and will continue to undertake significant projects along the way.
More importantly, Enbridge is so well entrenched in the oil and natural gas industry system that no company would dare encroach on its territory. Whatever benefits Enbridge is enjoying filters down to and creates goodwill with retirees.
RRSP investing is rewarding if you’re updated on your contributions and have quality stocks that can generate passive income within the account’s validity period.
