RRSPs
The Registered Retirement Savings Plan is the well-known Canadian registered plan that holds your money tax-free until you withdraw it, usually at retirement although you can withdraw money at any time except for locked-in plans.
Although you can get taxed on money you pull out of an RRSP, it's important to remember that a dollar today will be worth more than a dollar when you retire because of inflation and overall cost-of-living increases that can even be higher than inflation. That's why it can be beneficial to defer taxes as much as possible and invest the money in a registered plan.
By contributing to an RRSP, you may realize immediate tax benefits at a time when your income is generally highest. The income earned in your RRSP is not taxed until it is withdrawn and your investments grow tax sheltered. By the time you begin to withdraw the funds at retirement, you will probably be in a lower tax bracket than during your earning years. Funds withdrawn at that time will benefit from this lower tax rate.
You can choose from basic RRSP investments like mutual funds, GICs, and Canada Savings Bonds. These are handled by a portfolio manager. These RRSPs can include things like mutual funds and GICs.
Tax deferment is the big advantage of a registered plan like an RRSP over a non-registered plan. However, non-registered plans can give you a wider range of investment options and they don't have the dollar restrictions that RRSPs do. RRSPs limit how much you can contribute in any given year.
RRSPs also offer options that let you use a significant amount of RRSP money without paying taxes. These include things like the Home Buyers Plan, where you can withdraw up to $25,000 tax-free to buy a home if you are a first-time buyer. Another withdrawal option is Lifelong Learning Plan, where you can take out up to $20,000 to finance training or education for you or your spouse or common-law partner.
There also are a number of options for you to transfer money tax-free out of an RRSP into plans that can provide you with a steady stream of income.
Spousal RRSPs
This is an RRSP set up for the benefit of your spouse or common-law partner, where you make the contributions and your household can get additional tax deductions.
This type of RRSP lets you take advantage of income splitting. If your spouse has a lower income than you that means your spouse likely is in a lower income tax bracket. This means that the income he or she eventually draws from the RRSP would get taxed at the spouse's lower tax rate.
Like a regular RRSP, a spousal plan can be basic or self-directed, and can hold various kinds of investments depending on the type of RRSP. The spouse must be 71 years of age or younger, while the contributor can be any age.
RRSP Contribution Limits
Year Contribution
2013 $23820 or 18% of earned income
2014 $24270
2015 $24930
2016 $25370
2018 $26,230
RRIF
A Registered Retirement Income Fund lets you transfer your RRSP assets into it without tax liability to give you a steady stream of income after you retire.
Once you transfer RRSP funds to a RRIF, you must withdraw a minimum amount each year, specified by a formula based on your age. There is no maximum withdrawal limit. Income tax does apply to RRIF payments, although tax rates will be lower depending on the withdrawal amounts. Typically you only pay the highest tax rate on withdrawal amounts above $15,000.
You can start a RRIF any time until you turn 71. In the initial year of a RRIF, you aren't required to withdraw a payment until the following year.
Many RRIFs let you vary annual payments to meet your needs. Ask us how.
LIRA
Locked-In Retirement Accounts are an investment option for employees who leave a company and that company's pension plan. These accounts offer shielding from creditors and let you hang on to the tax-deferred status of the money in your pension plan.
If you leave your employer, you can transfer your pension to a LIRA. They're similar to RRSPs in that you control the investment decision. However, you can't make contributions to these plans beyond the transfer, and these funds are under pension legislation restricting the withdrawal of the funds. You can't mature a LIRA until you're within 10 years of normal retirement age. You also aren't allowed to cash in the plan and withdraw it as a lump sum.
However, you may convert a LIRA to a Life Income Fund (LIF) to give you a stream of income.
LIFs allow you to mature a locked-in retirement plan and receive income. Similar to RRIFs, you have to withdraw a minimum amount each year. Unlike RRIFs, there is a limit on maximum withdrawals as well. In Alberta you can receive a lifelong income from a LIF.
It's also worth noting that you may withdraw as much money as you need from a LIRA if you present a medical certificate that proves you have a disability expected to reduce your life expectancy.
TFSA
The Tax-Free Savings Account (TFSA) is a flexible, registered general-purpose savings plan that allows Canadians to earn tax-free investment income to more easily meet lifetime savings needs. The TFSA complements existing registered plans like the Registered Retirement Savings Plan (RRSP) and the Registered Education Savings Plans (RESP).
This amount of contribution will likely increase to $5,500 in 2013 and the limit will be set at $25,000. Withdrawals from a TFSA are tax-free and any unused TFSA contribution room is carried forward and accumulated in future years. If you have set up a TFSA and you are planning a withdrawal consider doing so before year end rather than early 2013 as amounts withdrawn are not added to your contribution room until the beginning of the following year after the withdrawal. You can hold a variety of investments in a TFSA including mutual funds and segregated funds.
The sooner you start, the better off you'll be. Procrastinating on your retirement planning could jeopardize your financial goals.
Tax-Free Savings Accounts
How Tax-Free Saving Accounts Work:
As of January 1, 2013, Canadian residents aged 18 and older can contribute up to $5,500 annually to a TFSA. Investment income earned in a TFSA is tax-free. Withdrawals are tax-free. Unused TFSA contribution room is carried forward and accumulates in future years. Full amounts of withdrawals can be put back into the TFSA in future years. Re-contributing in the same year may result in an over-contribution amount which could be subject to a penalty tax. Choose from a wide range of investment options such as mutual funds and GICs. Contributions are not tax deductible.
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