Retirement planning should not just be about money. It should start with your life goals and a clear vision of how you want to live your life in retirement. Having a financial plan and a solid investment portfolio will help you realize your retirement dreams.

How to save on tax while you save for retirement

When saving for retirement, one of the best ways to save on tax is to contribute as much as you can to a registered account, such as a:

• Registered Retirement Savings Plan (RRSP),
• Registered Pension Plan (RPP) or
• Tax Free Savings Account (TFSA)

These allow you to shelter your current income from being taxed now. Why is this an advantage? It allows you to defer paying tax on some of your income to the future, when your income may be lower. This means you will pay tax on your RRSP savings at a lower rate.

How RRSPs work

• You must have “earned income” in order to contribute to an RRSP. This includes money you make from employment, running your own business and rental income. It does not include investment income.
• You can claim a tax deduction for the amount you contribute each year, up to certain limits. In 2010, the maximum you can contribute is 18 per cent of your earned income from the prior tax year, up to $22,000. If you have a pension plan, you must subtract the amount you contributed from your RRSP contribution limit.
• If you don’t contribute the full amount you are allowed in one year, you can make a larger contribution later. In other words, you can carry forward any unused contribution room.
• The money you make investing your RRSP savings is not taxed. This allows your investments to grow more quickly.
• You pay tax on any dollars you withdraw from the plan, usually when you retire.
• You must close all your RRSPs by the end of the year in which you turn 71. You can move your savings over to a Registered Retirement Investment Fund.

RRSP rules can be quite detailed and complex. Learn more now from the Canada Revenue Agency

Tip: To find out your current RRSP deduction limit, check your latest Notice of Assessment or Reassessment. You receive this from Canada Revenue Agency each year after you file your tax return.

Consider registering for “My Account” with CRA. This on line service allows you to track your refund, view or change your tax return, check your benefit and credit payments, check your RRSP limit, set up direct deposit and much more.

How TFSAs work

• Any Canadian resident 18 or older can open a TFSA.
• You can contribute up to $5,000 each year. You earn this contribution room simply by filing your yearly tax return. Unlike an RRSP, you don’t have to report any earned income to contribute.
• If you don’t contribute the full amount you are allowed in one year, you can make a larger contribution later. In other words, you can carry forward any unused contribution room.
• If you contribute more than you are allowed, penalties will apply.
• You have to pay any income tax due on the money you contribute. You don't get to deduct your contribution from the income you report on your tax return. In this way, a TFSA is different from an RRSP.
• Once you put money in your account, it will grow tax-free for any goal you want – not just retirement. Unlike an RRSP, you don’t pay tax on any money you withdraw from your account.
• You can keep the account open as long as you want. You must close an RRSP by the end of the year in which you turn age 71.

Tip: If you have contributed fully to your RRSP, a TFSA can be a flexible way to build extra savings. Just note that you cannot transfer money from your RRSP to your TFSA.

Learn more now from the Canada Revenue Agency.

Other ways to manage taxes when you save and invest for retirement

Unlike RRSPs or TFSAs, non-registered investment accounts have no special “tax status”. You will pay tax on all the income you make from the investments you hold in these accounts. Some investments, however, attract less tax than others. Make sure you understand the rules so you can achieve the most favourable tax treatment.

Capital gains and losses

This includes interest, dividends, rents and royalties. You must report these amounts on Schedule 4, Statement of Investment Income, or on Form T776, Statement of Rental Income.

Tip: Interest income is taxed in the same way as income you earn from your job andis the least tax efficient source of investment income. But you can defer the tax you pay and even lower it. How? Place investments that earn interest – including bonds and Guaranteed Investment Certificates – inside a registered account like an RRSP or TFSA. You won’t pay tax on the interest you earn until you take the money out. If you withdraw the money later, after you retire – or whenever your income is lower – you may pay less tax.

Learn more now: What taxes will I pay when I invest?

You receive a capital gain when you sell capital property for more than you paid for it. You receive a capital loss if you sell capital property for less than you paid for it. Only half of the gain or loss is included in your income for tax purposes. Capital property includes stocks, bonds or, in some cases, real estate. You must report these transactions on Schedule 3, Capital Gains and Losses.

Tip: If you own securities that are worth less than their original cost and you intend to sell them, do so before the end of the tax year. Why? You can use the capital loss to reduce your tax bill. Learn more now from the Canada Revenue Agency Tip: Capital gains and dividends are taxed at a lower rate than interest. For this reason, if you have non-registered accounts, there may be some tax advantages to using them to hold stocks. Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.