RRSPs and Other Retirement and Investment Strategies
REGISTERED RETIREMENT SAVINGS PLAN (RRSP)
An RRSP is a registered account that allows you to make tax-deferred contributions towards your retirement savings plan. Subject to certain limits, each dollar you contribute to the plan lowers your taxable income by the amount you invest. Once you have made a contribution to an RRSP, your investments can grow tax-free until withdrawn. All contributions you make for the last year up until March 1 of the next year can be deducted from your income.
The goal is to defer your tax payments on the money you contribute until you’ve retired, at which point you will most likely be in a lower tax bracket. The power of your RRSP is the ability to let your investments compound tax free.
The maximum RRSP contribution limit for the year 2016 is $25,370. However, if you did not use all of your RRSP contribution limit for the years 1991-2014, you can carry forward the unused amount to 2011. Therefore, your RRSP contribution limit for 2016 may be more than $25,370.
The cash inside the plan can be used to purchase a wide variety of financial instruments such as GIC’s, mutual funds, segregated funds, stocks or bonds.
Some of the most efficient pension planning tools are Guaranteed Minimum Withdrawal Base Products
1 – Start as early as possible and invest regularly
Have you ever hear of time value of money? The earlier you start your contributions, the less money you will have to invest in order to get to desirable result. The magic of compound interest.
Develop a contribution plan and commit to it. Monthly contributions versus yearly lump-sum contributions are not only easier, but also provide the benefits of dollar-cost averaging and compounding. If your employer offers a group RRSP, your contribution can be automatically deducted from your pay.
2 – Build a diversified portfolio
Portfolio’s returns are determined partly by the choice of individual securities, but mostly by the way the portfolio is diversified. You can diversify your holdings by asset class, market sector, geographic region and investment style. The principle remains the same: by diversifying your holdings in a variety of ways, you lower the volatility of your portfolio while increasing its potential for higher returns.
3 – Utilize available contribution room
If you have unused contribution room available or have fallen short on contributing to your RRSP, a RRSP loan may be right for you. Once you receive your income tax refund, you could use the refund to pay down the loan.
4 – Consider income splitting
If the future tax rate of your spouse is expected to be lower than yours, you should consider income splitting by contributing to a spousal RRSP.
RRSP Contributions vs. Deductions (learn more) >>>
TAX FREE SAVINGS ACCOUNT (TFSA)
A Tax-Free Savings Account (TFSA) is a flexible, registered general-purpose savings vehicle that allows Canadians to earn tax-free investment income to more easily meet lifetime savings needs. The TFSA complements existing registered savings plans like the Registered Retirement Savings Plans (RRSP) and the Registered Education Savings Plans (RESP).
We all have a reason to save to fulfill important lifetime goals and aspirations. Whatever your reason, the TFSA can help you achieve your objectives.
You can use the TFSA to start saving early for a range of needs you may have in the future. In many instances you may prefer to use a TFSA to save for pre-retirement needs given the absence of tax consequences on withdrawals and the ability to avoid the use of RRSP room for non-retirement savings needs.
Starting in 2009, if you are a Canadian resident who is 18 years of age or older, you can contribute $ 5,000 per year to a TFSA account.
Unlike an RRSP, the contributions made to a TFSA are not tax deductible. On the other hand, the withdrawals are not taxed either.
A TFSA may hold a wide range of qualified investments such as stocks, mutual funds, segregated funds, bonds and GICs.
Much more on TFSAs >>>>
LOCKED IN RRSP or LIRA
If you are in a registered pension plan with your employer and leave that company, your pension will be transferred into a Locked-In Retirement Account (LIRA). Locked-In Retirement Accounts are sometimes referred to as the more appropriate name of Locked-In Retirement Savings Plans. LIRAs are similar to an RRSP, but as the name suggests, are locked-in until retirement.
The rules found in the Income Tax Act with respect to an RRSP apply to your LIRA. Therefore, you must purchase a life annuity or transfer money to a RRIF or a Variable Benefit Account by the end of the calendar year in which you reach 71 years of age.
While a Locked-In Retirement Account has many restrictions, it could help to protect the pensions of those who change careers a few times throughout their life.
REGISTERED RETIREMENT INCOME FUND (RRIF)
A Registered Retirement Income Fund (RRIF) is an account designed to provide retirees with a source of income after they have retired. Usually a RRIF is comprised of the funds that roll over from an RRSP, as an RRSP cannot be kept after the age of 71. The capital and interest in a RRIF accumulates tax-free, but is subject to tax upon withdrawal. Persons with an RRIF can withdraw any amount of money from the fund at any time, but any amount over the minimum will be subject to various degrees of withholding tax. The funds in a RRIF can only be sourced from another RRIF, an RRSP or another pension plan.
Like RRSP accounts, RRIFs can be comprised of multiple types of investments such as mutual funds, GICs, stocks, and simple annuities.
Advantage of a RRIF
The interest in a RRIF is allowed to grow tax free. Because the capital in a RRIF is almost entirely made up of rolled-over RRSP funds that have not been taxed, withdrawals from a RRIF are taxed as income. However, once in retirement, the beneficiary is most likely in a lower tax bracket. Furthermore, it is possible to calculate the minimum withdrawal amount according to the age of the beneficiary’s spouse, which is desirable if the beneficiary’s spouse is younger, and thus eligible for lower minimums. Lower minimums are desirable when the beneficiary has other accumulated funds to live off of, and wants to maintain the funds in his RRIF.
NON REGISTERED INVESTMENTS
Non registered investment accounts allow Canadian citizens to save money for the long term.
Non registered investments are different from registered investments only in that growth is taxed as it happens, depending on whether the investment provides capital gains, dividends or interest. Each type provides its own tax structure, some better than others.
Capital Gains are effectively the growth on a specific type of investments. The capital gain inclusion rate in Canada is currently 50%.
Dividend is an amount distributed out of a corporation’s retained earnings (accumulated profits) to shareholders. Dividends on preferred shares will usually be for a fixed amount. Dividends on common shares may fluctuate depending on the profits of the company. Dividends are generally grossed up by either 125% or 145%, depending on whether or not they are eligible or ineligible.
Interest is the most inefficient form of growth. Every dollar that the original investment grows is taxable compared to 50% of growth in capital gains, 25% to 33% in dividends. The type of investment vehicles that generates interest are Daily interest savings, GIC, Bonds.
REGISTERED EDUCATION SAVINGS PLAN (RESP)
Our children are our hope for the future. We want to make sure they have the best possible tools to succeed in their personal and professional lives.
Giving children access to a post-secondary education is something all parents hope to be able to do. However, with budget cuts in the education sector by various levels of government, a constant increase in the cost of a higher education is inevitable.
Unless you decide to take out a loan, it may be quite difficult to find the money needed to pay for a 4-year post-secondary program for just one child.
A registered education savings plan, commonly referred to as an RESP, is the best financial vehicle to help you save for a child’s post-secondary education. The federal government allows you to accumulate investment income on a tax-sheltered basis until the funds are withdrawn from the plan.
Increase your savings with the Canada Education Savings Grant
In January 1998, the federal government created the Canada Education Savings Grant (CESG) Program.
This program is primarily intended to encourage parents to save for their children’s post-secondary education.
The CESG provides an extra 20% in addition to the annual contributions paid into the plan by the subscriber, up to $500 per year per beneficiary. There is a lifetime limit of $7,200 per beneficiary.
An annuity is the simplest retirement income option. In exchange for a single lump sum investment, a financial institution makes guaranteed regular income payments to an investor that contain both interest and a return of principal.
The amount of payments is determined based on your age, current interest rates, the length of time the payments are guaranteed and the amount of money used to purchase the annuity.
This vehicle is ideal for you, if you: