Understanding Registered Plans
Registered Retirement Savings Plans (RRSPs)
A registered retirement savings plan (RRSP) is an arrangement between an individual and an issuer under which retirement income commences at maturity. Contributions are made by individuals and are deductible under the Income Tax Act. RRSPs can use various investments vechilesEarnings in the plan remain tax-free and payments out of an RRSP are taxable on receipt.
Types of Registered Retirement Saving Plans (RRSPs)
RRSP accounts can be set up with either one or two associated individuals:
An Individual RRSP is associated with only a single individual, termed an account holder. With Individual RRSPs, the account holder is also called a contributor, as only they contribute money to their RRSP.
A Spousal RRSP allows a higher earner, termed a spousal contributor, to contribute to an RRSP in the spouse’s name. In this case, it is the spouse who is the account holder. The spouse can withdraw the funds, subject to tax, after a holding period. A spousal RRSP is a means of splitting income in retirement: By dividing investment properties between both spouses each spouse will receive half the income, and thus the marginal tax rate will be lower than if one spouse earned all of the income.
In a group RRSP, an employer arranges for employees to make contributions, as they wish, through a schedule of regular payroll deductions. The employee can decide the size of contribution per year and the employer will deduct an amount accordingly and submit it to the investment manager selected to administer the group account. The contribution is then deposited into the employee’s individual account and invested as specified. The primary difference with a group plan is that the contributor realizes the tax savings immediately, instead of having to wait until the end of the tax year.
Registered Pension Plans (RPPs)
A registered pension plan (RPP) is an arrangement by an employer or a union to provide pensions to retired employees in the form of periodic payments. The Income Tax Act provides deductions in respect of both employee and employer contributions. Contributions and investment earnings are tax-exempt until such time as benefits commence to be paid.
Deferred Profit Sharing Plans (DPSPs)
A deferred profit sharing plan (DPSP) is an arrangement under which an employer may share profits from their business with all or a designated group of employees to provide pensions. Deductions under the Income Tax Act are provided in respect of employer contributions (employee contributions are not permitted) and tax is deferred on income in the DPSP until such time as benefits are received.
Locked-In Retirement Account (LIRA)
A type of registered retirement savings that locks in the pension funds in investments. While the funds are locked in, they are unavailable for cash-out. Pension funds that are transferred to a LIRA are used to purchase a life annuity, transferred to a life income fund (LIF) or to a locked-in retirement income fund (LRIF). Upon reaching the retirement age, the life annuity, LIF and/or LRIF provide a pension for life.
Registered Retirement Income Funds (RRIFs)
A registered retirement income fund (RRIF) is an arrangement between a carrier (an insurance company, a trust company or a bank) and an annuitant under which payments are made to the annuitant of a minimum amount each year. You transfer property to the carrier from an RRSP, RPP, or from another RRIF, and annual amounts must commence to be paid to the annuitant immediately. Property and earnings in a RRIF are tax-exempt and amounts paid out of a RRIF are taxable on receipt. Establishing a RRIF can be done at anytime, but must be done no later than the year the annuitant turns 71. Once a RRIF is established, there can be no more contributions made to the plan nor can the plan be terminated except through death.
Tax-Free Savings Account (TFSA)
Starting in 2009, Canadian residents who are 18 years of age or older will be able to earn tax-free investment income within a Tax-Free Savings Account (TFSA) during their lifetime.
Contributions to a TFSA are not deductible for income tax purposes. Also, interest on money borrowed to invest in a TFSA is not tax deductible. However, the income generated in such an account (for example, investment income and capital gains) is tax-free, even when it is withdrawn.
The TFSA dollar limit is $5,000 in 2009, and will be indexed to inflation and rounded to the nearest $500 in later years. Unused TFSA contribution room can be carried forward to later years. The total of TFSA withdrawals in a calendar year is added to the TFSA contribution room for the next calendar year.
Registered Education Savings Plans (RESPs)
A registered education savings plan (RESP) is a contract between a subscriber and a promoter (banks, trust companies and scholarship funds) and is a tax-deferred way to save for a beneficiary’s post-secondary education. Contributions made by the subscriber are not tax deductible but earnings on such contributions are held in a tax-exempt trust. Contributions may be eligible for Canada Education Savings Grant (CESG) payments that are managed by Human Resources and Skills Development Canada (HRSDC). Investment earnings on contributions and CESG payments grow tax-free until they are distributed and included in the recipient’s income and taxed accordingly.
Canada Education Savings Grant (CESG)
Human Resources and Skills Development Canada (HRSDC) provides an incentive for parents, family and friends to save for a child’s post-secondary education by paying a grant based on the amount contributed to an RESP for the child. The CESG money will be deposited directly into the child’s RESP.
No matter what your family income is, HRSDC pays a basic CESG of 20% of annual contributions you make to all eligible RESPs for a qualifying beneficiary to a maximum CESG of $500 in respect of each beneficiary ($1,000 in CESG if there is unused grant room from a previous year), and a lifetime limit of $7,200.
HRSDC will also pay an additional CESG amount for each qualifying beneficiary. The additional amount is based on your net family income and can change over time as your net family income changes.
Canada Learning Bond (CLB)
Human Resources and Skills Development Canada (HRSDC) provides an additional incentive of up to $2,000 to help modest-income families start saving early for their child’s education after high school (post-secondary education). The CLB money will be deposited directly into the child’s RESP.
For families entitled to the National Child Benefit (NCB) supplement for their child, the CLB will provide an initial $500 to children born on or after January 1, 2004. To help cover the cost of opening an RESP for the child, HRSDC will pay an extra $25 with the first $500 bond. Thereafter, the CLB will also pay an additional $100 annually for up to 15 years for each year the family is entitled to the NCB supplement for the child.
If the beneficiary does not pursue post-secondary education, the CLB is returned to the government.
Non-registered accounts are fully taxable annually and may involve interest, dividend or capital gains tax that is realized inside the account. Unlike RRSPs, non-registered accounts have no contribution limits and are more easily liquidated.
At Boggs Financial we can help you decide which type of product Registration will best meet your needs.
For a free consultation on how this product may help protect you! Contact us at 519-848-2939.