RRSP TFSA RRSP LIRA RRIF Locked-in RRSP Spousal Nonregistered LIF Accumulation Withdrawals Accumulation and withdrawals RRSP Spousal RRSP RRIF TFSA Life Annuity LIRA LIF Locked-in RRSP Nonregistered • 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 • Amounts withdrawn are 100% taxable.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. 31st of the year the annuitant turns 71. Tax-deductible contributions - example Marginal Tax Rate 25% 35% 45% RRSP Contribution $10,000 $10,000 $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 Portfolio value Annual investment income (4% interest rate) MTR Net annual investment income RRSP and TFSA Non-reg. $100,000 $100,000 $4,000 $4,000 35% 35% $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… RRSP TFSA Tax-deductible contributions Yes No Tax-sheltered investment income Yes Yes Fully taxable withdrawals Yes No Carry forward of unused contribution room Yes Yes Contribution rights recoverable after withdrawal No Yes 71 years None Maximum age • 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 Annuitant/Owner • Gets tax deduction. • Must have RRSP room. • Controls the RRSP (investment choice, withdrawals, etc.). • Taxed on withdrawals, but beware attribution rule. Last contribution Attribution Rule 2012 2013 2014 2015 2016 2017 2018 • 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 Splitting Income Splitting Husband - Gross Income $85,000 $50,000 Wife – Gross Income $15,000 $50,000 $100,000 $100,000 23.7% on husband 4.7% on wife 17.5% for both $79,150 $82,500 ---- $3,350 Total Gross Income Average Tax Rate (province of Ontario 2013) Total Net Income Annual Tax Savings 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. RRSP Spousal RRSP RRIF • Client maintains control of investment strategy , amount and frequency of withdrawals. • Except for the calendar year in which the RRIF is setup, a minimum amount must be withdrawn each year. – The minimum withdrawal amount is based on the RRIF value and age of client on January 1st of each year. • Withdrawals are fully taxable. • Money remaining in RRIF is tax-sheltered. Before age 71: [1 / (90 – age at Jan. 1st)] x RRIF market value at Jan. 1st Age on Jan. 1st Min. withdrawal Age on Jan. 1st Min. withdrawal 71 7.38% 83 9.58% 72 7.48% 84 9.93% 73 7.59% 85 10.33% 74 7.71% 86 10.79% 75 7.85% 87 11.33% 76 7.99% 88 11.96% 77 8.15% 89 12.71% 78 8.33% 90 13.62% 79 8.53% 91 14.73% 80 8.75% 92 16.12% 81 8.99% 93 17.92% 82 9.27% 94 + 20.00% • 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 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. 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 • 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 nonregistered 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 nonregistered plan must be used and the other plans are not available. TFSA RRSP LIRA Locked-in RRSP Spousal RRSP Life Annuity RRIF LIF Nonregistered • 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).