Retirement

Plan Your Retirement With AWM

Retirement Planning is about making sure you have sufficient financial resources to retire comfortably. According to the Fraser Institute, most Canadians are significantly underfunded to retire comfortably at 85. Although it should be a priority for everyone, most people tend to put it off.

RRSP – Registered Retirement Savings Plan

The Registered Retirement Savings Plan is the well-known Canadian registered personal savings plan that allows you to save for your retirement on a tax-sheltered bases, so your money grows faster. 

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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 The income earned in your RRSP is not taxed until it is withdrawn and your investments grow tax sheltered.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 Funds withdrawn at that time will benefit from this lower tax rate.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.

Advantages

  • Your annual contribution can be deducted from your gross income, reducing the amount of tax you contribute.
  • The income you earn is sheltered from tax, allowing it to grow faster. By the time you retire and withdraw funds, you will likely be in a lower tax bracket. 
  • Withdraw RRSP money to buy your first home or pay for you or your spouse’s education without penalty providing it’s repaid within a specific amount of time. You can withdraw up to $35,000 for your first house, however repayment begins 2 years after you withdraw funds and you have 15 years to complete repayment. 
  • Lifetime Learning Plan is withdrawn from your RRSP for full time education or training for you, your spouse or common-law spouse. It must be repaid over 10 years starting 5 years after your first LLP, $10,000 annually lifetime $20,000. 

 

Who Qualifies?

If you have earned an income and filed an income tax return in Canada you can contribute to an RRSP until December 31st of the year you turn 71. You must also have contribution room available, which is on your Notice of Assessment by the CRA.

 

 Contribution Limits

  • There are contribution limits on RRSPs. To find the exact amount you can contribute for the current year, you must see your recent Notice of Assessment.
  • Deduction’s, the lesser of two items: 18% of your earned income in the previous year.
  • The annual limit for 2020 was $27,230

Spousal RRSPs

A spousal RRSP is set up for the benefit of your spouse or common-law partner. It allows you to contribute money to your spouses or common-law partner’s RRSP up to your personal contribution limit. When a contribution is made to the spousal RRSP, the contributor receives a tax deduction. This can help you balance your income as a couple and works best when a large disparity exists between you and your spouse’s income. By contributing to a Spousal RRSP, the higher -earning spouse receives a tax deduction that could lower their personal tax bill. On the other hand, the lower earning spouse should get taxed at a lower marginal tax rate when the money is withdrawn from the Spousal RRSP. This means potentially paying less tax on your Spousal RRSP assets at retirement. 

This type of RRSP lets you take advantage of income splitting. This will potentially reduce the families overall tax bill in retirement by more evenly splitting sources of Retirement Income. 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.

RRIF – Registered Retirement Income Fund

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

A LIRA (Locked-In Retirement Accounts)is a type of Registered Pension Fund in Canada that does not permit withdrawals before retirement except in exceptional circumstances. The LIRA is designed to hold pension funds for a former plan member, an ex-spouse or surviving spouse.  These accounts offer shielding from creditors and let you hang on to the tax-deferred status of the money in your pension plan.

Cash withdrawals are not permitted while the funds are locked in. Pension funds that are transferred to a life income fund (LIF) or a locked-in retirement income (LRIF). 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. Once the fund’s beneficiary reaches retirement age, the LIF or LRIF provides pension for life. 

A LIRA may be created to hold funds that are transferred from a pension plan for a variety of reasons. The beneficiary may have left the job. The fund may be split with a divorced spouse, or the beneficiary may have passed, leaving the fund to an heir. 

An RRSP can be cashed in at the owner’s discretion. The LIRA does not have such an option. 

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.

 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 – Tax-Free Savings Account

A 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). Anyone over the age of 18 years old with a social insurance number can open a TFSA. The amount of contribution is $6,000 per annum with a total allowable of $75,000. Tax free gains and no tax to withdraw funds of any amount. 

Great news is that taking out funds from a TFSA doesn’t reduce the total amount of contributions you already made that year. Beneficiaries can be a spouse or common-law spouse or Designated Beneficiary would include former spouses children. 

The sooner you start, the better off you’ll be. Procrastinating on your retirement planning could jeopardize your financial goals.

LIF – Life Income Fund

A LIF (Life Income Fund) is a type of RRIF offered in Canada that can be used on hold locked in pension funds as well as other assets for eventual payout as retirement income. An LIF cannot be withdrawn in a lump sum. Owners must use the fund in a manner that supports retirement income for their lifetime. Each Year’s income Tax Act specifies the minimum withdrawal amounts for an RRIFs which encompassed LIFs.

LIFs are offered by Canadian financial institutions. They provide individuals with an investment vehicle for managing the payout from locked in pension funds and other assets. In many cases pension assets may be held but not accessible if an employee leaves a firm may require conversion to a LIF when the owner is taking withdrawals.