RRSP / RRIF - Financial Source

Registered Retirement Savings Plan

RRSP

A Registered Retirement Savings Plan (RRSP) is a tax sheltered and tax deferred savings plan introduced by Revenue Canada in 1957 to encourage people to save for their retirement. RRSPs are recognized by the Federal and Provincial tax authorities, whereby deposits can be fully tax deductible in the year of deposit and will be fully taxable in the year of receipt. This ability to defer taxes on RRSP earnings allows one to save much faster than is ordinarily possible because earnings compound tax-free throughout the life of the plan. Keep in mind that you don’t have to use the deduction in the year of contribution. You can carry forward contributions to deduct in future years, perhaps when your taxable income is greater.

Contributions

Canadian taxpayers who are eligible to contribute to an RRSP receive an income tax Notice of Assessment each year from Revenue Canada concerning their RRSP contribution limit. Contributions for the present year are based on your earned income of the previous year. A person may have as many different RRSPs as one wants but your yearly contributions must stay within this contribution limit. Any unused portion from previous years can be carried forward and there is a $2,000 allowable lifetime over-contribution available. If at any time you have gone over the $2,000 over-contribution limit, Revenue Canada will penalize you 1% each month until the extra contributions have been removed from the plan. Eligible investments for RRSPs include cash, bonds, stocks, mutual funds, segregated funds, and guaranteed investments certificates.

Withdrawing

While the primary importance of an RRSP is to defer a part of your income until retirement years, there is nothing to prevent you from using some of these savings as emergency funds to carry you through a period of unemployment or maybe a planned sabbatical from work. If you withdraw funds from your RRSP, there will be a 10% withholding tax on any amount under $5,000, 20% on amounts up to $15,000 and 30% on amounts over $15,000. (Quebec withholding tax has different taxation thresholds.) Keep in mind the withholding tax is not cumulative. For example, if you withdraw $7,500, the tax will be $1,500 or 20% of the amount and NOT 10% of the first $5,000 and then 20% of the next $2,500.

Conversion

Canadian taxpayers who are eligible to contribute to an RRSP receive an income tax Notice of You must convert your RRSP by the end of the year in which you turn age 71. The choices for conversion are to simply cash it in and pay full tax in the year of receipt, convert it to a Registered Retirement Income Fund (RRIF) and take a varying stream of income, paying tax on the amount received annually until the income is exhausted, or converting it into an annuity with guaranteed payments for a chosen number of years or for life, again paying tax each year on income received. each year from Revenue Canada concerning their RRSP contribution limit. Contributions for the present year are based on your earned income of the previous year. A person may have as many different RRSPs as one wants but your yearly contributions must stay within this contribution limit. Any unused portion from previous years can be carried forward and there is a $2,000 allowable lifetime over-contribution available. If at any time you have gone over the $2,000 over-contribution limit, Revenue Canada will penalize you 1% each month until the extra contributions have been removed from the plan. Eligible investments for RRSPs include cash, bonds, stocks, mutual funds, segregated funds, and guaranteed investments certificates.

Registered Retirement Income Fund

RRIF

A Registered Retirement Income Fund (RRIF) is one of the three options available to Registered Retirement Savings Plan (RRSP) holders to convert their tax sheltered savings into taxable income. The other two options are either to cash in your RRSP or purchase an annuity.

The RRIF is a flexible payout of the lump sum of money which you have accumulated in your RRSP. Withdrawals are based on your age (or the age of your spouse if elected) and the payments are taxable. However, the investments within the RRIF continue to grow tax-free until they are withdrawn.

Transfer

You may have as many RRIFs as you wish and you may transfer capital from one RRIF to another RRIF or to a new RRIF at any time. When you convert your RRSP into a RRIF, you are not required to withdraw any payments in that year, although you may do so if you wish. You will be required to withdraw the minimum payment by the end of the following year and it can be done monthly, quarterly, semi annually or in one lump sum. If you don’t choose a RRIF or annuity by the end of the year in which you become 71 years of age, the financial institution that holds your RRSP may cash it in and send you the cash less any income taxes which must be withheld. The total value of your cashed in RRSP will be added to your income for that year.

Payment

If you are trying to minimize the amount of payment you withdraw from your RRIF, you might consider basing your payments on the age of a younger spouse. Current rules allow basing minimum RRIF payments on the age of either spouse. Consider also that upon your death, any unused portion of your RRIF can be rolled over to your surviving spouse without tax implications. Your spouse will continue receiving regular taxable payments as you did.

Seniors Pension

You do not have to be 71 years of age to convert your RRSP into a RRIF. If you do not have any other pension income, you may consider converting at least enough of your RRSP savings into a RRIF to generate $2,000 a year in RRIF income which will qualify for the senior’s pension income credit. A senior’s pension income credit applies to the first $2000 of pension RRIF or annuity income. (The Canada Pension Plan doesn’t apply.)

Spousal Registered Retirement Savings Plan

Spousal RRSP

A Spousal Registered Retirement Savings Plan is an RRSP owned by the spouse (plan holder), not by the person contributing to it. The contributor receives the tax deduction but once the money is in the plan, it is under the plan holder’s control. Amounts withdrawn from a Spousal RRSP will be taxed back to the contributor if the withdrawal is made within 3 years of the contribution date. To be eligible for spousal contributions, the spouse must be legally married to the contributor or have common law status as defined in the Income Tax Act.

Contribution

If the contributor so wishes, he/she can direct up to 100% of eligible RRSP deposits into a Spousal RRSP each and every year, however, contributing to a Spousal RRSP reduces the amount one can contribute to one’s own RRSP. If the spouse is a lower income earner, a Spousal RRSP is an excellent way in which to prepare for the splitting of income for lower taxation in retirement years.

Remember, whatever you contribute to your spouse’s RRSP is a full deduction from your own taxable income in the year for which you make the contribution, unless you use the deduction in a later year. And, your deposits into your spouse’s RRSP do not limit the amount which your spouse may be able to contribute to their own RRSP.

Rules

The RRSP rules direct that you can no longer contribute to your own RRSP after the end of the year in which you become 71 years of age but if you are still earning income, contributions can be made to a spousal RRSP until that spouse reaches the age of 71.

A little known fact is if you earn income at age 71, you could over-contribute to your RRSP in December of that year, pay the 1% penalty for that month, but claim the full deduction the following year. Keep in mind your RRSP contribution limit is based on your previous year’s earned income which, in this case, means you won’t know it until after the year in which you turn age 71, when it will be too late to contribute to your own RRSP. If you have earned income and thus contribution room after age 71, you can make contributions to the RRSP of a spouse who is 71 or younger.

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