The Registered Retirement Savings Plan (RRSP) began to provide Canadians with a way to save for their retirement and get a tax break. An advantage to the program was that a higher income earner could open an account for their lower earning spouse, but take the deduction from income themselves. In retirement, the money would be taxed to the spouse. The amount per year is determined by earned income and there is a cap ($25,370 for 2016, plus any amounts left over from previous years.) Many people have considerable room in their contribution pool. Look on your Notice of Assessment for the amount. Oddly, contribution time for a particular year is from March 1st to Feb 28 of the next year.
At age 71 you must swap it to a Registered Retirement Income Fund (RRIF). The per year payout is determined by the government. It is meant to last a person’s lifetime, which could be until 90 or even older. This can result in a low payout per year. Payments are taxable as income.
For a couple, when one passes away, their RRSP accounts can be rolled over to the survivor. Another problem arises when the second spouse passes, as the total amount in the RRSP is taxable in that year. This can create a very high tax burden which is payable by the estate. Older couples should drain their RRSPs first. Transfer unneeded funds into a TFSA.
Tax is withheld on any withdrawal, but at a maximum of 10%. Alberta’s minimum tax rate is 25%, so be aware you may owe tax.
Two programs allow you to withdraw money without paying tax:
The Home Buyer’s Plan (HBP) lets you take out up to $25,000 for the purchase deposit on a residence. It must be paid back starting after one year, but you have 15 years to do so. You can choose to contribute to any RRSP or to pay the tax on the amount owing that year.
The Life-Long Learning Plan (LLP)is for a return to secondary school. Up to $10,000 for each of two years can be withdrawn. The repayment term is 10 years.
The Tax Free Savings Account (TFSA) fixed the main issue with the RRSP– that if you were already in the lowest tax bracket, you lost money since your tax bracket doesn’t change and the increase in the account value was now taxable. The TFSA allows you to put money into the plan (after you’ve paid the tax) but you aren’t taxed on withdrawals (growth included). Contribution room reappears the year after a withdrawal. The current cap is $10,000 per year and access starts when you reach 18. You can have multiple accounts but the total contribution cannot exceed your total pool. (An 18 year old in 2017 can contribute 10,000. If they first contribute in 2018, the cap is $20,000.)
Both plans have a wide assortment of investment options. You can access them through your bank or various investment companies and their brokers. Depending on your risk tolerance, you can invest in Guaranteed Interest Certificates, bonds, a self directed investment account, mutual funds or segregated funds or use a basic savings account for small goal savings like a vacation or car. Some investments have guarantees that your principal will be protected, others do not.
An investor can have multiple accounts with different institutions: The only limit is that the total amount contributed cannot exceed the cap. Many people have a considerable amount available in either category, so any lottery winnings can be nicely sheltered.
As with all financial decisions, consult a professional.
Fitzpatrick Financial Services
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