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Retirement Planning

RRSPs

RRSP Contribution Limits

Registered retirement savings plans (RRSPs) were introduced in 1957 to provide an income tax incentive to save money for retirement. Two (2) key advantages of RRSPs are;

  1. deferral of income taxes on the portion of income that is contributed to an RRSP; and
  2. deferral of income taxes on the investment income earned in the plan.

RRSP Deduction Limits

  1. 18% of "earned income" for the taxation year, or
  2. $26,010.00 - 2017
    $26,230.00 - 2018

The RRSP deduction limit is increased by any unused RRSP deduction room carried forward.

"Earned income" consists of salary and wages, commissions, taxable benefits (i.e. group life insurance premiums paid by the employer), taxable family support income, net Business income, and net income from the rental of real property. Earned income also includes research grants, CPP/QPP disability payments, employee profit sharing plan allocations, supplementary unemployment benefits and certain royalties. In calculating earned income, any employment expenses (such as union or professional dues, or salesperson’s expenses) claimed by the taxpayer must be deducted. Earned income is also reduced by losses from Business operations and the rental of real property, and by deductible family support payments.

Note: Dividends, interest, annuities and pensions do not qualify as earned income.

* For a detailed calculation, refer to Revenue Canada’s RRSP & Other Registered Plans for Retirement tax guide.

 To find out about ?

  • when should I contribute ?
  • can I make extra contributions to your RRSP ?
  • how much of my RRSP can be invested in foreign property ?
  • how should I choose a plan ?
  • what if I withdraw funds under the Home Buyers’ Plan ?
  • should I pay down my mortgage or contribute to an RRSP ?
  • how long can I contribute to my RRSP ?
  • what if I need the funds before I retire ?
  • what happens when I retire ?
  • what happens to my RRSP if I am no longer a resident of Canada ?
  • are there any benefits in naming my children as beneficiaries ?
  • what happens to my RRSP when I die ?

Contact us!

LIRA (Locked-in Retirement Account)

If you were previously a member of a pension plan, you may entitled to transfer your locked-in pension funds to a locked-in RRSP (also called a LIRA).

Locked-in Retirement funds cash withdrawals have restrictive rules which are regulated by the Financial Services Commission of Ontario. Should you become disabled with an illness that shortens your life expectancy, these funds may be withdrawn. If you die, the locked-in funds may be required to be paid to your spouse.

Depending on the original pension legislation governing your lock-in funds, at the maturity date of your plan (usually no earlier than age 55) you may have the following income options for your locked-in funds:

  • purchase a life annuity (joint and survivor annuity if you have a spouse), or
  • transfer funds to a Life Income Fund (LIF) or Locked-in Retirement Income Fund (LRIF)

Effective January 1, 2008 – Ontario Pension Legislation Changes

Effective January 1, 2008 a new Ontario Life Income Fund (“New LIF”) will be available for purchase.  This will replace the current LIF, which will no longer be available for sale after December 31, 2008.

Clients who open a New LIF have 60 days from the date on which their funds are deposited into the New LIF  to unlock up to 50% of the value.  The unlocked portion may be transferred to an RRSP or a RRIF without any taxable consequences.

Also the calculation has been expanded for the New LIF plans, to allow the owner to have access to the greater of the amount paid under the formula in the New LIF (same formula as in the current LIF) or the amount of investment earnings in the previous year.

Also effective July 27, 2007, owners of existing LIF’s are no longer required to purchase an annuity by the end of the year in which they reach 80 years of age.  Owners may still purchase an annuity at any age but are not required to do so.  Contract maturity dates for LIFs will be extended past age 80 without requiring client or advisor requests to extend.

Existing Ontario LIF clients will have the option to change to the New LIF.  More details will be available in 2008.

Please note that the above summary does not cover all of the new pension regulations.  Please visit the Financial Services Commission of Ontario website at:  www.fsco.gov.on.ca/english/pensions/ for further information.

RRIFs

Registered Retirement Income Funds are the result of conversion of your RRSP by December 31 of the year you attained age 71. RRIFs are simply an RRSP that you can’t contribute to and requires you to withdraw a minimum amount each year.

The growth within the RRIF retains its tax sheltered status and only the income withdrawn from the plan is taxed at your current marginal tax rate.

Most RRIF tax plans advocate keeping the RRIF withdrawals to the lowest amount possible. This is good tax planning because it will minimize your taxable income and possibly the tax rate. For example, at the lowest levels of income, no taxes are payable because of the impact of personal tax credits. Even if there is some income, the key is to ensure the RRIF income does not elevate you into a higher tax bracket. This type of RRIF planning can be better describes as "marginal tax planning".

Another way to look at RRIF tax is to think of it as a repayment of an interest free loan from Revenue Canada.

 Basically, funds were advanced to via a tax refund when you made an RRSP contribution and you also enjoyed the tax free growth of investments in your RRSP. Revenue Canada is simply requesting payment of this tax. To the extent that we can pay this tax on the RRIF withdrawals at a lower marginal tax rate when compared to the marginal tax rate that applied when we made the RRSP contribution, then we have not only technically received an interest free loan but we will also realize a tax savings.

To get the scoop on additional tax advantaged RRIF planning tips, contact us.

LIFs

A Life Income Fund, is a retirement income option available in most provinces for a locked-in RRSP, a Locked-in Retirement Account (LIRA) and pension money. A LIF effectively extends the date on which you have to purchase a Joint and Survivor Annuity to the end of the year in which you attain age 80.

LIF payments can occur monthly, quarterly, semi-annually or annually. The total of all payments received each year must fall between the LIF minimum and maximum. This amount is calculated at the beginning of the year based on a formula established by pension legislation (CANSIM rate).

At death, the benefit must be paid to your spouse. Your LIF may also allow your spouse to become the annuitant and continue to receive payments. If you do not have a spouse at the time of your death, the LIF will be paid to the named beneficiary or to your Estate.

LRIF (Alberta & Saskatchewan)

If you have pension money governed under the laws of Alberta or Saskatchewan, you can invest into a Locked-in Retirement Income Fund. A LRIF is similar to a LIF in that it can only be purchased with locked-in pension money.

There are a couple of differences between the two:

  1. LRIF maximum payments are calculated differently than LIF maximums (based on the plan’s investment earnings).
  2. LRIF plans never have to be converted to an annuity. You can hold an LRIF for as long as you live.

Annuities

When interest rates are high, annuities provide the investor an opportunity to lock-in the rate for their lifetime versus the GIC traditional five (5) year term. Annuities can be structured in many ways depending on your income needs. The old myth of the insurance company getting all the money on the death of the annuitant is no longer the case. Annuities provide a wide range of survivorship benefits which extend the repayment of capital to your designated beneficiaries.

Prescribed annuities provide the annuitant with guaranteed income in a favourable tax environment. To obtain a quote, contact us.

E.&O.E.