Personal Investments - Overview of Various Plans

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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• Amounts withdrawn are 100% taxable.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).
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