Primarily for retirement. Contributions are tax deductible. Investment income is tax sheltered. Maximum contribution established by the CRA is lesser of: – 18% of previous year’s earned income – Fixed dollar amount - $23,820 in 2013 ($24,270 in 2014) Look at your client’s Notice of Assessment from the CRA. Unused contributions are carried-forward. Amounts withdrawn are 100% taxable. Latest date when an RRSP must be closed: Dec. 31 st of the year the annuitant turns 71.
Tax-deductible contributions - example Marginal Tax Rate25%35%45% RRSP Contribution$10,000 Tax Savings$2,500$3,500$4,500 Net Cost$7,500$6,500$5,500
Be careful… Because withdrawals are fully taxable, timing of withdrawal is important.* Ideal for retirement savings because withdrawals at retirement replace in part income earned while working. RRSP withdrawals do not increase the contribution limit. *Withdrawals done through the Home Buyer’s Plan or Lifelong Learning Plan are not taxable immediately.
Introduced in 2009, available to individuals who are 18 years or older, with a valid Canadian SIN. Contributions are not tax deductible. Investment income is tax sheltered. Maximum contribution established by the CRA is currently $5,500 per calendar year (since 2013, was $5,000 per year from 2009 to 2012). – Annual limit indexed based on inflation and rounded to nearest $500 Unused contributions are carried-forward Withdrawals are not taxable and are added to the following year’s contribution limit.
Tax-sheltered investment income RRSP and TFSANon-reg. Portfolio value$100,000 Annual investment income (4% interest rate) $4,000 MTR35% Net annual investment income $4,000$2,600
Because withdrawals are tax-free, can be used for various financial goals: Major purchase or project Trip Emergency fund Family or charitable legacy Retirement Any other project…
RRSPTFSA Tax-deductible contributions YesNo Tax-sheltered investment income Yes Fully taxable withdrawals YesNo Carry forward of unused contribution room Yes Contribution rights recoverable after withdrawal NoYes Maximum age 71 yearsNone
If expected tax rate at retirement is lower than current tax rate: RRSP If expected tax rate at retirement is higher than current tax rate: TFSA If expected tax rate at retirement is same as current tax rate: RRSP or TFSA – Although, for this last situation, an RRSP may be the better option because it is less tempting to withdraw money from RRSP for reasons other than retirement.
RRSP Contributor Gets tax deduction. Must have RRSP room. Annuitant/Owner Controls the RRSP (investment choice, withdrawals, etc.). Taxed on withdrawals, but beware attribution rule. $ $ $ $ $ $ $ 2012201320142015201620172018 Last contribution Attribution Rule
Splitting retirement income equally between two people in a couple is a tax-effective strategy. Although the government now permits an individual to split income from a RRIF, LIF or life annuity with his spouse or common-law partner, only possible when annuitant is 65 years old. For those wanting to retire before age 65, a spousal RRSP can still help to split retirement income.
No Income SplittingIncome Splitting Husband - Gross Income $85,000$50,000 Wife – Gross Income $15,000$50,000 Total Gross Income $100,000 Average Tax Rate (province of Ontario 2013) 23.7% on husband 4.7% on wife 17.5% for both Total Net Income $79,150$82,500 Annual Tax Savings---- $3,350
Typical situations where a spousal RRSP can be used: One of the spouse has a pension plan with employer and the other does not, a spousal RRSP could be open for the latter. When the couple is comprised of a high income earner and a low income earner: – High income earner has more RRSP contribution room and will benefit from a larger tax deduction.
Client maintains control of investment strategy, amount and frequency of withdrawals. Except for the calendar year in which the RRIF is set- up, a minimum amount must be withdrawn each year. – The minimum withdrawal amount is based on the RRIF value and age of client on January 1 st of each year. Withdrawals are fully taxable. Money remaining in RRIF is tax-sheltered.
Age on Jan. 1 st Min. withdrawalAge on Jan. 1 st Min. withdrawal 717.38%839.58% 727.48%849.93% 737.59%8510.33% 747.71%8610.79% 757.85%8711.33% 767.99%8811.96% 778.15%8912.71% 788.33%9013.62% 798.53%9114.73% 808.75%9216.12% 818.99%9317.92% 829.27%94 +20.00% Before age 71: [1 / (90 – age at Jan. 1st)] x RRIF market value at Jan. 1st
Individuals with money in a pension plan of a former employer can transfer that money into a LIRA or Locked-in RRSP: – LIRA: Pension plan registered with province – Locked-in RRSP: Pension plan registered at the federal level Funds remain tax-sheltered and are locked-in; withdrawal limits and constraints different in every province and at the federal level. Age limit: 71 years old. Jurisdiction of LIRA is based on pension plan province of registration, not client’s province of residence.
A few typical exceptions to the “lock-in” rules Shortened life expectancy Small amount in LIRA after a specific age (i.e. in Ontario, this exception applies if age is 55 or more) Financial hardship Ontario rules: http://www.fsco.gov.on.ca/en/pensions/Pages/Default.aspx Federal rules: http://www.osfi-bsif.gc.ca/osfi/index_e.aspx?ArticleID=2660
LIRA LIF Locked-in RRSP Defined Contribution Pension Plan
Similar to a RRIF – Control of investments, amounts and frequency of withdrawals – Annual minimum withdrawals – Fully taxable withdrawals – Money in the LIF remains tax-sheltered. There is an annual maximum withdrawal amount. – The maximum withdrawal varies depending on the jurisdiction of the LIF. LIF’s jurisdiction is the same as the LIRA or pension plan from where the money comes from.
As with LIRAs, a few typical exceptions to the “lock-in” rules Shortened life expectancy Small amount in LIF after a specific age (i.e. in Ontario, this exception applies if age is 55 or more) Financial hardship Ontario rules: http://www.fsco.gov.on.ca/en/pensions/Pages/Default.aspx Federal rules: http://www.osfi-bsif.gc.ca/osfi/index_e.aspx?ArticleID=2660 In addition, for a LIF, most jurisdiction offer the possibility of a one-time withdrawal or transfer of 50% of the amount, starting at a certain age and within a specific period.
Contributions do not qualify for tax deductions. Investment income is taxed in year it is earned: – Interest income = fully taxable – Canadian dividends = qualify for a tax credit which reduces the amount of taxes due – Capital gains = only half is taxable No taxes on withdrawals except if an unrealized capital gain is triggered. If capital loss is triggered, client can apply it to any other capital gain in the year, or carry it forward.
When should they typically be used? For major purchases, projects or other goals than retirement, maximise TFSA and then use a non- registered plan. For retirement savings, maximising either the RRSP or TFSA, or both is usually more beneficial. If the client is a company or association, a non- registered plan must be used and the other plans are not available.
Guaranteed income for life Income payment ends upon death of the annuitant, except if: – There’s a guaranteed period added to the life annuity and death of annuitant occurs before end of guaranteed period, payments continue until end of guaranteed period. – A joint last-to-die annuity is purchased, payments continue until the last death. Annuity payments are fully taxable if money comes from a registered plan. Only the interest portion of the annuity payments are taxable if money comes from a non-registered plan or a TFSA.
When can it be used? With clients who don’t like volatility. With clients worried about outliving their money. With clients that don’t have enough financial discipline (i.e. risk of withdrawing too much money at a time). As part of a complete retirement income, to cover ongoing fixed costs. (especially if client doesn’t have pension income).