As the years go by more and more companies are getting rid of their defined benefit plans. This is because they are a big liability for them. A defined benefit plan means a guaranteed pension income from the same company you work for until your death indexed to inflation. The 2 most dependable defined benefit plans are for government employees and military personnel. To replace these plans, new retirement plans came out which were defined contribution plans?
What are defined contribution plans?
A defined contribution plan is where the individual is responsible for their own retirement. An employer might match a percentage of your salary up to a given percentage ( which is basically free money). With a defined contribution plan there is no guarantee of your investment gaining in value. For example, if you are about to retire and there is a big stock market crash then the value of your portfolio could be drastically reduced.
The 2 common defined contribution plans in North America are the RRSP ( Canadian) and 401k (US). These are basically tax deferral plans, in which you investments grow tax free, until you go take the money out. An added benefit of investing in these plans you can claim a tax deduction for your contributions against the your taxable income at tax time. The higher your tax bracket, the greater percentage of the tax deduction that you are eligible for.
An individual can invest in various investment vehicles inside the registered savings plan such as stocks, bonds and mutual funds.
What happens if you take money out of your plan early? When you take money out early, you are penalized and plus come tax time you are taxed at your marginal tax rate. At a previous employer, there was a GROUP RRSP plan. When I left there, a few months late I called the place that the company has it GROUP RRSP through. They told me I can switch it too an individual plan. I decided to cash it out has it was small. I was penalized right away at 10% of the balance right away and then taxed at my marginal rate at tax time.
Currently, I am not investing in an RRSP as I would like to escape the rat race early in life. Currently, I invest in a non-registered account and a TFSA.
So, why be an investor?
Today, more and more people are responsible for their own retirement!!! Individuals can make better investment decisions by learning how to read financial statements and increasing their financial education. Individuals can read financial information from reports published by companies, the investor relations section of a company's website or various financial websites. If an investor is not comfortable investing on their own, they can still use a financial planner or broker.