Personal Finance

How do you open a 401k if you're a freelancer?

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  • Aug 2nd, 2009 9:09 am
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[OP]
Member
Aug 11, 2007
261 posts
Canada

How do you open a 401k if you're a freelancer?

and what is the maximum amount you can invest in a 401k per year in Canada?
19 replies
Deal Addict
Sep 22, 2007
4599 posts
120 upvotes
We don't have 401K's, do you mean RRSP?
[OP]
Member
Aug 11, 2007
261 posts
Canada
spf1971 wrote:
Aug 1st, 2009 8:07 pm
We don't have 401K's, do you mean RRSP?
We don't?.. I guess so, yes.
Deal Addict
Sep 22, 2007
4599 posts
120 upvotes
It's 18% of your income minus any pension adjustment and it gets carried over if you don't use it. If you still have your tax return from last year, it will tell you how much you can deposit.

There is also the "Tax Free Savings Account" and you can put $5000 into that each year. It's also carried over if you don't use it.
Jr. Member
Aug 8, 2006
105 posts
4 upvotes
Go to any financial institution (like banks) and request to open up a RRSP. The maximum amount is calculated by your previous year's income. Thus you must file your taxes in the previous year. The CRA will send you a notice (in notice of assessment) to indicate how much you can contribute to an RRSP.

If you want to understand the formula an details go to the CRA website search RRSP. http://www.cra-arc.gc.ca
[OP]
Member
Aug 11, 2007
261 posts
Canada
spf1971 wrote:
Aug 1st, 2009 8:13 pm
It's 18% of your income minus any pension adjustment and it gets carried over if you don't use it. If you still have your tax return from last year, it will tell you how much you can deposit.

There is also the "Tax Free Savings Account" and you can put $5000 into that each year. It's also carried over if you don't use it.
yeah I have a TFSA with ING.. in regards to the RRSP, what is the annual interest rate and is RRSP and RSP the same thing?
Deal Addict
Sep 22, 2007
4599 posts
120 upvotes
blade007 wrote:
Aug 1st, 2009 8:20 pm
yeah I have a TFSA with ING.. in regards to the RRSP, what is the annual interest rate and is RRSP and RSP the same thing?
RSP and RRSP are the same.

Pretty much anything can be held inside an RRSP, depending upon what you are investing in,(GIC's, Mutual Funds, Stocks, Mortgages etc.) you will have different returns.
[OP]
Member
Aug 11, 2007
261 posts
Canada
I'm not seeing the benefits of having a RRSP or RSP..

in the US employees can match the company's 401k (lets say 5%) and be able to invest up to $15500 per year not including the companies match with a rate of return of 8% and if you do a little math those are big returns in the long run.. are RRSPs the closest thing to a 401k in Canada? if so that just sucks.

do Canadian employers match rrsps?
Deal Addict
Sep 22, 2007
4599 posts
120 upvotes
Employers can match your contributions but the main advantage is that you get to deduct any contribution from your current earnings. If you deposit $10,000 today, you save the tax on that amount of money. The idea is that you will save more in tax today in comparison to what you will pay once you retire. It's mainly a way to defer tax when you are in a high tax bracket until you are in a low tax bracket.
[OP]
Member
Aug 11, 2007
261 posts
Canada
spf1971 wrote:
Aug 1st, 2009 9:04 pm
Employers can match your contributions but the main advantage is that you get to deduct any contribution from your current earnings. If you deposit $10,000 today, you save the tax on that amount of money. The idea is that you will save more in tax today in comparison to what you will pay once you retire. It's mainly a way to defer tax when you are in a high tax bracket until you are in a low tax bracket.
ic soo if i were to open up a rsp account with ING (http://www.ingdirect.ca/en/save-invest/ ... index.html) and lets say my deduction limit is $5k, i then put $5k in there, would the company match the $5k and deposit the amount in my rsp ING account? and if I were a freelancer can I double the deduction limit.. :confused:

also at what age can you withdraw your rsp funds without being heavily penalized. in the US it's 59 1/2 (in terms of a 401k), what is it for Canadians in terms of rsp's?
Deal Addict
Sep 22, 2007
4599 posts
120 upvotes
Your limit is your limit. If you have a $10,000 limit it doesn't matter if you or your company contributes, the most you can put away is $10,000.

It doesn't matter when you withdraw the money. You deduct the contribution from your taxes and you add the withdraw to your taxes. The penalty for withdrawing the money is solely dependent on the tax bracket you are in at the time you make the withdrawal.
Deal Addict
Dec 5, 2004
2074 posts
59 upvotes
Medicine Hat
blade007 wrote:
Aug 1st, 2009 9:21 pm
ic soo if i were to open up a rsp account with ING (http://www.ingdirect.ca/en/save-invest/ ... index.html) and lets say my deduction limit is $5k, i then put $5k in there, would the company match the $5k and deposit the amount in my rsp ING account? and if I were a freelancer can I double the deduction limit.. :confused:

also at what age can you withdraw your rsp funds without being heavily penalized. in the US it's 59 1/2 (in terms of a 401k), what is it for Canadians in terms of rsp's?
you are a freelancer, you have no company, so no.
[OP]
Member
Aug 11, 2007
261 posts
Canada
spf1971 wrote:
Aug 1st, 2009 9:32 pm
Your limit is your limit. If you have a $10,000 limit it doesn't matter if you or your company contributes, the most you can put away is $10,000.

It doesn't matter when you withdraw the money. You deduct the contribution from your taxes and you add the withdraw to your taxes. The penalty for withdrawing the money is solely dependent on the tax bracket you are in at the time you make the withdrawal.
lets say i made around $55k per year, so my deduction limit is $10k (18%) and i invested the full $10k per year for the next 20 years into a RSP, how much extra money would i make/saved? does Canada have some sort of rate of return?

and would it be pointless to have a RSP if you have a TFSA which you max out every year, cause this is what i am seeing. edit: and also withdrawing funds from a RSP would be hefty even in 20 years (http://www.cra-arc.gc.ca/tx/ndvdls/tpcs ... s-eng.html) compared to no tax penalties on a TFSA
Deal Addict
Sep 22, 2007
4599 posts
120 upvotes
blade007 wrote:
Aug 1st, 2009 10:00 pm
lets say i made around $55k per year, so my deduction limit is $10k (18%) and i invested the full $10k per year for the next 20 years into a RSP, how much extra money would i make/saved? does Canada have some sort of rate of return?

and would it be pointless to have a RSP if you have a TFSA which you max out every year, cause this is what i am seeing. edit: and also withdrawing funds from a RSP would be hefty even in 20 years (http://www.cra-arc.gc.ca/tx/ndvdls/tpcs ... s-eng.html) compared to no tax penalties on a TFSA
1. Instead of paying taxes on $55k today, you would only have to pay tax on $45k. You would immediately save in the range of $4500. Whatever interest you make while inside the RSP, remains tax free until you withdraw it.

2. You don't receive any tax break for money placed into a TFSA. You would still have to pay the full tax on $55k today.

3. You pay taxes at your applicable tax rate when withdrawing from an RSP but you don't have to pay tax when withdrawing from a TFSA.

4. The benefit of a RSP over a TFSA is the tax break.

I.E. You make $55K and deposit $5k into either a RSP or a TFSA.

TFSA: you pay tax on the full $55k.

RSP: you pay tax on only $50k saving you roughly $2500.
Deal Fanatic
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Oct 25, 2003
9127 posts
261 upvotes
401Ks are matched contributions from a company.

You'll have to open up an IRA if you want to stash money away for retirement if you're a freelancer.

ROTH IRA for post-tax amount, like TFSA
it's me ramin.

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