By Brenda Spiering, Editor, BrighterLife.ca
You don’t need to be born with a silver spoon in your mouth to build wealth. With the right products, you can grow and protect a healthy nest egg.
Here are five key financial products that should be part of your plan:
1. Registered Retirement Savings Plan (RRSP)
As soon as you begin your working life, you should have a registered retirement savings plan (RRSP). It’s one of the most tax-effective ways to save for retirement. You’re allowed to contribute up to 18% of your earned income from the previous year to a maximum of $23,820 for 2013 ($24,270 for 2014). (If you’re a member of a group pension plan, your contribution room is reduced by your “pension adjustment,” an amount you’ll find listed on your T4.)
Contributions are tax deductible, meaning you can net a tidy tax refund while building your savings. Plus, you can turbo-charge your RRSP savings by putting that tax refund back into your RRSP as soon as you receive your cheque
2. Tax-Free Savings Account (TFSA)
TFSAs are the relatively new kid on the investment block in Canada. Introduced by the federal government in 2008, TFSAs let you save up to $5,500 a year for 2013 and 2014 and, while contributions aren’t tax deductible, there’s no tax payable on investment growth and withdrawals are tax-free.
A TFSA is an ideal savings tool for both long-term and short-term goals such as a vacation or home renovation. Also, for younger Canadians who haven’t yet reached their earning years, a TFSA is a great way to start saving for the future.
3. Life insurance
While TFSAs and RRSPs help build wealth, you also need to think about protecting your financial future. That’s where life insurance comes in. If you’re married, have kids or own a business, you should have a life insurance policy in place in case anything happens to you. How much you need depends on your personal situation but it should be enough to cover any debts you may have (including your mortgage) and help cover your family financially for as long as possible.
4. Critical illness and disability insurance
It’s important to not only have life insurance but to ensure you’d be financially protected should you ever become unable to work due to illness or injury. Would your workplace benefits provide you with adequate coverage? If not, what would happen to you and your family?
Critical illness insurance helps pay the costs associated with a life-altering illness such as cancer or a stroke. You receive a lump sum payment if you become critically ill and you decide how you wish to spend the money.
Disability insurance protects you from a potential loss of income due to injury or illness. You receive a recurring monthly payment to cover ongoing financial costs. Even if you have workplace group disability benefits, it’s often wise to have your own personal policy to provide you with additional coverage.
5. Registered Education Savings Plan (RESP)
If you have kids, an RESP is a must. It’s a special savings account that lets you save for your kids’ education after high school. Income earned inside the plan accumulates tax-free until it’s withdrawn and then it’s taxed in the hands of the child (meaning usually no tax is payable).
Not opening an RESP to save for your child’s education means you’re also turning down free money. That’s right. The Government of Canada will match 20% of your annual contributions up to a maximum of $500 per year to a lifetime maximum of $7,200 per child. That’s a big boost in savings!
Learn more by watching the following videos:
Original source: Five financial products you should own written by Brenda Spiering for BrighterLife.ca.
© Sun Life Assurance Company of Canada, 2014