Registered Retirement Savings Plans (RRSPs)
RRSPs are one of the most recognizable government-sponsored savings programs – originally introduced by the Federal Government in 1957, RRSPs encouraged Canadians with earned income to contribute moneys for the benefit of their own retirement. Earned income generally includes all incomes earned by an individual from Canadian sources, except from investments, annuities and pensions.
Contributions - Contributions made to an RRSP are tax-deductible and income earned within the plan is exempt from tax until withdrawn; promoting long-term tax-deferral. Since 1991, any unused RRSP contribution room may be carried forward (preserved) and utilized in future years.
Tax Savings & Deferral -- Beyond the initial and ongoing benefit of tax-deductibility and deferral, spousal contributions provide an effective means of income-splitting by way of shifting future earned income (withdrawals) into the hands of the lower-income spouse. Recently pension income-splitting legislation allows for withdrawals from “matured” RRSPs (from a RRIF or LIF) to be split between pensioners aged 65 and older. Further, the ability to name a surviving spouse or (eligible) financially dependent child as beneficiary will allow for a tax-free rollover upon the passing of the Annuitant (registered plan owner.)
Maturing Options & Withdrawals – RRSP proceeds may be withdrawn subject to withholding tax, transferred to a Registered Retirement Income Fund (RRIF) or used to purchase a Life Annuity (guaranteed term or fixed term annuity.) Partial withdrawals from an RRSP may be accomplished at any time subject to applicable withholding taxes; unless the withdrawals are part of the Home Buyer’s Plan or Lifelong Learning Plan.
Registered Retirement Income Fund (RRIF)
RRIF plans are designed to receive maturing RRSP assets and are generally established on/before December 31st of the year the plan Annuitant (registered owner) achieves 71 years of age. While no further contributions are eligible, assets may remain invested within the RRIF plan until withdrawn.
Retirement Income - Compared to an Annuity, a RRIF allows for greater control and flexibility in terms of management of his/her savings and withdrawal options. Withdrawals from a RRIF may be deferred until December 31st of the year the Annuitant turns age 72. Withdrawals are subject to a minimum annual withdrawal; based on age and the value of the account on December 31st of the previous year.
Locked-In Plans
Locked-in plans are designed to accommodate a situation where an individual who has vested benefits in a registered pension plan terminates his/her employment or membership in the plan prior to being eligible to receive their retirement pension income.
Dependent upon the provincial or federal legislation involved, vested proceeds may be received by a Locked-In RRSP (BC and Federal legislated plans) or Locked-In Retirement Account (Alberta and Ontario legislated plans,) similar to an RRSP. As the term suggests, locked-in pension proceeds cannot be immediately withdrawn, but instead may be transferred upon “maturity” into a Life Income Fund (LIF) (or other such locked-in alternative) depending upon the legislation involved.
A Life Income Fund (LIF) is a temporary alternative to an Annuity for proceeds from a Locked-in RRSP/LIRA. Withdrawals must be made each year, (starting the year after set-up,) subject to minimum and maximum withdrawal percentages imposed to prevent the LIF from being depleted too quickly.
Deferred Profit Sharing Plans
A Trust registered with CRA arranged for all employees or certain “classes” of employees whereby the employer makes contributions to the plan out of company profits, on behalf of its employees. Like an RRSP, contributions and earnings accumulate within the plan tax-free until withdrawn by plan members upon their retirement or earlier; once the contributions vest (usually 2 years.)
Similar to RRSPs, the member’s combined RRSP/DPSP contribution room shall be reduced in any year, reflecting the amount of contributions made to the DPSP.
Group Plans
Group RRSPs are similar to individual plans, though employer sponsors sometimes offer to match employee contributions; to encourage retirement savings. Unlike DPSP Trusts, employer contributions generally vest immediately, and as such Group RRPS proceeds may be withdrawn or transferred at any time.
