Personal Finance

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

  • Last Updated:
  • Aug 2nd, 2009 9:09 am
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Deal Addict
Jul 28, 2005
3237 posts
25 upvotes
blade007 wrote:
Aug 1st, 2009 9:00 pm
with a rate of return of 8%
I don't know of any 401k that has a guaranteed rate of return of 8%. I think you are misunderstanding both 401k's and RRSPs.
does Canada have some sort of rate of return?
No. You misunderstand what a RRSP is.
and also withdrawing funds from a RSP would be hefty even in 20 years
And you are misunderstanding how withdrawals work. :)

If you take a withdrawal it is the same as if you earned it as income.



You probably want to do some reading, to understand the basics of Canadian personal finance. May I suggest Personal Finance for Canadians for Dummies. It covers the basics well.
Deal Addict
Dec 28, 2006
2373 posts
64 upvotes
Saskatoon
blade007 wrote:
Aug 1st, 2009 9:21 pm
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?
spf1971 wrote:
Aug 1st, 2009 9:32 pm
The penalty for withdrawing the money is solely dependent on the tax bracket you are in at the time you make the withdrawal.
There is no penalty per se on a withdrawal from a RRSP like there is in the US when you withdraw from a 401K.

Money that you put in a RRSP has never been taxed so you simply have to include the withdrawal in your income for the year and pay tax accordingly.

When you withdraw from a 401K before you turn 59 1/2 you have to include the withdrawal in income AND pay a penalty.

blade007 wrote:
Aug 1st, 2009 10:00 pm
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
Hardly pointless. In a way by comparing RRSP and TFSA you are comparing apples to oranges.

You fund a TFSA with after-tax money, so you have to earn it, and then pay tax on it at your current rate, then any growth inside the TFSA is tax-free.

You fund a RRSP with PRE-tax money, so you earn it, pay no tax on it or any of the growth until you withdraw it. Presumably this is when you are retired, at which point most people are in a lower tax bracket than when they were working. So you have deferred taxation for many many years and will pay a lower rate of tax on withdrawal than you would have if you had not put the money in the RRSP.

Plus the contribution limits are much higher for RRSP. Once you have put your $5000/yr into the TFSA where are you going to put any additional savings/investments?
[OP]
Member
Aug 11, 2007
261 posts
Canada
ic.. still a little confused on the company matching thing, if my deduction limit was $10k and I invested the full $10k for the year, how can the company match it/put more money into my RSP account if I already reached my limit?

also I plan on opening a RSP account with Questrade, who do you guys have your RSP account with?
Deal Addict
Jul 28, 2005
3237 posts
25 upvotes
blade007 wrote:
Aug 2nd, 2009 1:55 am
ic.. still a little confused on the company matching thing, if my deduction limit was $10k and I invested the full $10k for the year, how can the company match it/put more money into my RSP account if I already reached my limit?
They can't. And don't assume every company is going to offer a match, especially if you are a freelancer.
Jr. Member
Aug 8, 2006
105 posts
4 upvotes
Don't associate RRSP/RSP to a company match plan. They do not coexist together unless it is company policy.

Some companies have an investment matching plan in which if you contribute to an RRSP/ATSV (after tax savings vehicle) or other then they will provide a percentage into another savings vehicle. Usually a DPSP. However, if they do this then the amount you can contribute into an RRSP the following year is reduced. So on and so on... The reduction portion is calculated in something called a PA. As the PA increases the RRSP room decreases. The PA amount is usually the amount of a DPSP and a formula based on a company pension plan (RPP/DCPP/DBPP). The are other factors & something called a PAR but this is the simple view.

Again, as the previous posters indicated. An RRSP is a tax deferal vehicle (you can avoid pay taxes now) and you don't pay taxes on any investment earned until withdrawl. Otherwise for the same investment you pay now.

There is benefit if you know how to manage your taxes.

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