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Registered Retirement Savings Plan (RRSP)
RRSP Brochure
A Registered Retirement
Savings Plan is a government approved plan through which you save
money for your retirement years. Your contributions, within limits,
are tax deductible, and the income earned is tax sheltered. You can
have any number of plans.
You are investing money when you can most afford it
during your peak earning years - to build up a comfortable retirement
fund.
Not only do you invest some money that would
otherwise be paid in taxes, but the earnings of your plan are not
taxed until you withdraw them. Since 100% of these earnings can be
reinvested and compounded, the growth of your RRSP increases rapidly
over the years.
Your retirement savings will also increase
significantly if you make each RRSP contribution as soon as allowed,
for example, early in the year.
The first stage of an RRSP is to accumulate
retirement savings. The next stage is to provide retirement income.
Your accumulated savings may be invested in a variety of options to
provide a retirement income that can continue for life or to age 90.
Only the retirement income payments are taxed each year as you receive
them, thus spreading the taxation of your accumulated savings over
your retirement years.
Anyone with "earned income" subject to Canadian
taxation, including non-residents, may contribute to an RRSP. Even if
you are not taxable, you should file a tax return to report your
earned income and create RRSP deduction room.
You can make part or all of any contribution to a
plan in your spouse's name. You, as the contributor, are
still entitled to the tax deduction. Contributions can be made until
the end of the year in which the plan-holder's 69th birthday occurs.
An
over-contribution can be carried forward beyond this
year and deducted in subsequent years providing you have earned
income on which to base the deduction.
For income tax purposes, currently a spouse is
defined as a person of the opposite sex, to whom you are married or
have lived with on a common-law basis for the last 12 months. This
period can be less than 12 months if both spouses are the natural or
adoptive parents of the same child, or if your partner has a child who
is wholly dependent on you for support and over whom you have custody.
Effective 2001, the definition of spouse will apply only to legally
married couples. At the same time, "common-law partner" will be
introduced, defining two persons, regardless of sex, who cohabit in a
conjugal relationship and have done so for a continuous period of at
least 12 months. The common-law partnership definition applies until
the cohabitation has ceased for 90 days.
Your RRSP deduction is based on your prior year's
earned income. The following qualify as earned income:
-
salary, wages, bonuses and taxable fringe
benefits (minus union or professional dues and employment expenses
claimed as deductions)
-
taxable wage loss replacement or long-term
disability income resulting from employment
-
Canada Pension Plan disability benefits
(only)
-
net income from self-employment (minus current
year business losses)
-
net rental income from real estate (minus current
year rental losses)
-
taxable alimony or maintenance payments received
-
royalties of an author or inventor
-
net research grants
NOTES:
-
Earned income must be reduced by deductible
alimony or maintenance payments.
-
Interest, dividend and capital gains income, and
E.I. benefits, do not qualify as earned income.
-
Income that is not taxed, such as Workers'
Compensation and welfare benefits, cannot be used as earned income.
Your Notice of Assessment from Revenue Canada,
received after filing your tax return, will state your RRSP deduction
limit for the following year. Any time after receiving this Notice,
you can also phone the Revenue Canada TIPS line listed in your
telephone directory to confirm your deduction limit. The calculation
of the amount will depend on whether you are a member of a pension
plan, and if you are, the type of pension plan.
Your RRSP deduction limit (preceding paragraph)
does not include
special transfers
to your RRSP.
NOTE:
The amount of RRSP contributions you can deduct
from your income ("RRSP deduction limit") may be less than the amount
you can contribute (see
Over-contributions). Employer
contributions made to an RRSP on your behalf form part of your RRSP
contribution.
CAUTIONS:
Before making any RRSP deduction, make sure you
will still be fully utilizing your available tax credits for the year.
The greater the future benefits provided by
your pension plan, the less you will be able to deduct as RRSP
contributions. This addresses the main objective of the Retirement
Savings legislation - to create equality in the tax-sheltered
retirement benefits available to all taxpayers, regardless of their
type of pension plan, or whether they are self-employed, or employed
but have no pension plan.
In addition to your RRSP deduction limit, there are
a number of special deposits you can make to your RRSPS.
Lump Sum Transfers
You can transfer lump sums DIRECTLY from a
Registered Pension Plan or a Deferred Profit Sharing Plan (DPSP) to
your RRSP.
You can
transfer amounts
DIRECTLY from another of your RRSPs or
from your
RRIF to your RRSP.
RRIF Payments in Excess of Minimum
Until the end of the calendar year in which you
turn 69, you can transfer DIRECTLY to an RRSP in your own
name up to 100% of any payment from your RRIF in excess of the
mandatory minimum payment amount for the year. Revenue Canada form
T2030 can be used for this purpose.
Retiring Allowances
A retiring allowance is a lump sum or sums paid to
you by your employer, at or after your termination, in recognition of
your loss of employment. Accumulated sick leave credits paid qualify
under this definition but holiday pay, death benefits and pension
benefits do not. The portion of a retiring allowance eligible for
sheltering in your own RRSP can either be transferred directly
(no income tax deducted), or up to 100% can be contributed in the year
of receipt or within 60 days thereafter. No portion of a retiring
allowance can go to an RRSP in your spouse's name.
The maximum retiring allowance that can be
sheltered is:
-
$2,000 for each full or partial calendar year of
service with your current employer prior to 1996, plus
-
an additional $1,500 for each full or partial
calendar year of service prior to 1989 with your current employer,
in which you were not a member of a pension plan or DPSP, or years
for which your employer's contributions to such plans have not
vested in you.
The transfer of a retiring allowance to an RRSP
does not affect your RRSP deduction limit for that year.
Effective January 1, 1999 the subscriber under a
Registered Education Savings Plan can transfer up to $50,000 of
accumulated income from an RESP to an RRSP in the name of the
subscriber or the subscriber's spouse. The following conditions must
be met:
-
The RESP must have been in existence for at least
10 years.
-
All current and former beneficiaries under the
RESP must be at least 21 years of age and not be eligible to receive
education assistance payments.
-
Only amounts transferred within the subscriber's
RRSP deduction limit and deducted in that year will avoid taxation.
There is a special 20% surtax on excess accumulated income withdrawn
by the subscriber.
Part or all of your
RRSP deduction limit can
be contributed to RRSPs for your
spouse.
Any amounts you contribute to RRSPs for your spouse
are subject to a 3-year attribution period. (See
Withdrawals
from spousal RRSPS.)
If one spouse will be in a higher tax bracket in
retirement, as much of the RRSP funds as possible should be
accumulated in the name of the spouse who will be in the lower
bracket. The income eventually created from the funds will then be
taxed at that spouse's lower tax rate.
To set up a spousal RRSP, your spouse applies for a
plan in his or her name, even though your spouse may not have any
earned income. Although you make the contributions to the plan, the
assets of the plan belong to your spouse. Even if you are over 69, you
can contribute to an RRSP for your spouse until the end of the
calendar year in which your spouse turns 69.
If your spouse also wishes to contribute to an RRSP
based on his or her own income, a plan separate from the spousal plan
is strongly recommended.
One final note - having RRSP funds in both spouses'
names will ensure that both of you can qualify for the pension income
credit by age 65 (see below).
If you don't claim your maximum RRSP deduction, you
can carry forward the unused deduction room indefinitely. This applies
whether or not you actually make a contribution. Your Notice of
Assessment from Revenue Canada records any cumulative deduction room
carried forward after 1990 in determining your maximum RRSP deduction
for the current year.
If you don't have the cash to contribute now, you
can make larger catch-up contributions in future years when you have
the cash available. Perhaps you will even avoid higher rates of tax by
making contributions in the future. But remember, you maximize your
retirement savings by making each RRSP contribution as early as
possible.
If you have the cash to contribute now, but expect
your income to be taxed at a higher rate in the future, you can
contribute now and claim the deduction in a future year. This strategy
is not penalized as an over-contribution, as long as your
contributions are within your deduction room. And it has the advantage
of tax-sheltering the earnings on your contribution.
The official tax receipt should be filed with your
tax return in the year of contribution, even if not deducted, and the
amount reported on Schedule 7 of your tax return.
The pension income credit is a federal income tax
credit of up to $160 (16% of the first $1,000 of qualifying income).
Since provincial income taxes are a percentage of the basic federal
tax, this will also save you an additional amount in provincial taxes.
If your taxable income for a year is less than $29,590, the first
$1,000 in qualifying payments may be tax free to you.
Amounts that DO qualify for this credit.
At any age:
If you are 65 or over in a year, or regardless of
age if received as a result of the death of your spouse:
-
income from a RRIF, LEF, LRIF or annuity
purchased with RRSP or DPSP funds
-
interest earned on term certain (general)
annuities
Amounts that DO NOT qualify.
-
Old Age Security
-
any payments from the CPP or Quebec pension plans
-
retiring allowances
-
lump sum withdrawals from a pension or
superannuation plan
-
cash withdrawals from an RRSP
You may contribute any time during the year.
Contributions made during the first 60 days of any year may be
deducted for the current or the immediately preceding taxation year.
If you are contributing by mail, the plan issuer on
or before the contribution deadline must receive your application
and/or deposit.
Over-contributions are contributions that exceed
your deduction room. An over-contribution can be made by an individual
who was 18 years of age or over in the prior year, and can be carried
forward indefinitely. The 1995 federal budget reduced the penalty-free
RRSP over-contribution limit to $2,000 from the $8,000 that applied
since 1991.
You are not forced to withdraw excess contributions
of up to $8,000 made prior to February 27, 1995. Starting with your
RRSP deduction for 1996 you had to deduct your over-contribution in
excess of $2,000 before making any further RRSP contributions. It may
take a number of years to reduce the over-contribution to $2,000.
If you make contributions that increase your
over-contribution above $2,000, you will pay a 1% penalty per month on
the amount in excess of $2,000. Non-voluntary (normally employer)
contributions to group RRSPs based on current earnings are not taken
into account until after the end of the year in which they are made.
At that time your additional deduction room for the current year will
reduce the excess.
Any excess contribution you cannot deduct may be
refunded without additional taxation. You must receive a refund
subject to the above penalty in the year you over-contributed, in the
year the Notice of Assessment for that year is issued, or in the
following year. However, if Revenue Canada can prove that at the time
you made the contribution you had no reasonable prospect of being able
to deduct it for that year or for the prior year, and that you made
part or all of the contribution with the intent of withdrawing it
tax-free, they can deem the refund of the over-contribution to be
taxable to you. Therefore you should not intentionally make an
over-contribution unless you are sure you will be able to
use it as your RRSP deduction in one or more future years,
based on earned income.
You can carry forward an over-contribution beyond
the year in which you turn 69. You can deduct part or all of it in any
subsequent year within your deduction limit.
Yes, but you cannot deduct interest on money you
borrow to contribute to an RRSR You should not use an RRSP as security
for a loan. If you do, you could be taxed on the value of the plan.
After the RRSP issuer has processed your RRSP
contribution, you will receive an official receipt. This must be
attached to your tax return to claim your deduction.
Credit unions, banks, trust companies, life
insurance companies, investment dealers and mutual fund companies all
sell RRSPS. While all RRSPs provide the same tax deduction, not all
plans are the same. Each issuer offers one or more ways to invest your
money, and the growth rates, terms, conditions and fees vary.
Before you invest in any RRSP, ask about deposit
insurance protection. There is no insurance on mutual funds, nor on
most investments commonly held in self-directed RRSPS.
There are three basic types of individual plans
available: Deposit Type Plans, Mutual Funds, and Self-Directed Plans.
The following is a short description of each plan but remember that
plan features will vary among issuers.
Deposit Type Plans
Deposit-type RRSPs are the most common plans. They
offer familiar savings options including saving accounts, term
deposits or guaranteed investment certificates. The rate of interest
may be variable, fixed or index-linked. Key choices include the term
of the deposit (ranging from daily to multi-year); and frequency of
interest calculations and payments to the RRSP (daily, monthly,
annually, or end of term). Key considerations include the issuer's
policy regarding early withdrawals (your investment may be
non-redeemable for the term); and deposit insurance coverage.
Mutual Funds*
There are money market funds, income funds and
equity funds. The first is invested in short-term securities such as
treasury bills and government and corporate notes. Income funds have
the same investments from time to time, but predominantly invest in
longer-term bonds and mortgages. Equity mutual funds invest in
stocks. There are also balanced funds that hold
all three types of investments.
The funds are divided into units. Unit values are
updated frequently based on the market value of the investments.
Since mutual fund investments do and will fluctuate
in value, they don't provide a guaranteed rate of return. Sales fees,
called front-end or back-end loads, can be charged on the acquisition
or redemption of units. In addition, all mutual funds pay management
fees. When mutual funds are held in an RRSP, income or capital gains
distributions are usually used to purchase additional units.
*
Mutual funds are offered through Credential Asset Management Inc.
Commissions, trailing commissions, management fees and expenses all
may be associated with mutual fund investments. Please read the
prospectus before investing. Unless otherwise stated, mutual fund
securities and cash balances are not insured or guaranteed and are
not covered by the Canada Deposit Insurance Corporation or by any
other government deposit insurer that insures deposits in credit
unions. Their values change frequently and past performance may not
be repeated.
Self-Directed Plan
With this kind of plan, you can make all your own
investment decisions within a wide range of qualified investments. A
trustee does all the administration work for you. You can invest up to
30% in foreign (non-Canadian) investments.
Self-directed plans are suitable for those with
considerable investment experience and ample time to manage the funds.
This type of plan may be uneconomical for those with limited RRSP
funds because of the normal administration and transaction fees.
Plans involving mortgages usually incur
substantially higher fees. It is permissible to hold within your
self-directed RRSP a mortgage on any property you own that is eligible
for mortgage insurance, although this will result in additional
mortgage insurance, legal and possibly appraisal fees. Generally, you
should only do this with more than $25,000 of RRSP funds, and should
plan for the mortgage to exist for more than 3 years.
Locked-in RRSPs in some jurisdictions can be used for this
investment, and more than one self-directed RRSP can invest in the
same mortgage.
(Employer-Sponsored)
Group RRSPs have become popular in recent years as
more and more employers make them available to their employees. They
can have all the same investment options as the other types of plans.
An individual account is maintained within the group RRSP for each
participating employee. A group RRSP can also provide for an employee
to contribute to an account in their spouse's name.
Contributions to a group RRSP by an employer form
part of the employee's deduction limit. They are also taxable income
to the employee, offset by receiving an RRSP contribution receipt. You
may not be able to withdraw the employer's contributions and/or your
own contributions, and the income thereon, as long as you remain in
that employment.
Contributions to group RRSPs by employers and
employees are usually voluntary. Employer contributions vest
immediately. If employees contribute through payroll deduction, the
income tax deducted from their pay cheque is reduced at the same time,
recognizing the reduction in their taxable income.
When the employment terminates, you can usually
transfer the funds from the group RRSP to an individual RRSP.
Capital gains or dividends earned in an RRSP
increase its value. All of the funds eventually coming out of an RRSP
must be declared as income for tax purposes. Therefore, you will
eventually pay tax on 100% of any capital gains and a full rate of tax
on any dividends realized within an RRSP. Compare this to investments
held outside an RRSP. Only 75% of capital gains would be taxed and you
would pay a reduced amount of tax on the dividends by being able to
claim the dividend tax credit.
Always be sure to ask about fees before deciding on
an RRSP Not all issuers charge fees, but many do. Here are a few of
the most common charges:
Front-End Load
Many issuers sell RRSPs through commissioned
salespeople. The sales costs are often deducted from your
contribution. Only the net amount is actually invested for you.
Back-End Load
Instead of a front-end load, many mutual funds
offer the option of a deferred sales fee if you close out the plan
within a certain number of years. This can be a percentage of the
original contributions or the value at redemption. The percentage
usually decreases for each year you stay invested in the same group of
funds, and reaches nil within a maximum of ten years.
Management Expense
This is an annual fee paid by the mutual fund to
cover administrative costs including trustee fees, investment advisor
fees and the cost of government reporting. Over a number of years,
this can represent a significant reduction in the net yield from your
plan.
Other Fees
Many issuers charge a flat fee on RRSP withdrawals,
or if you transfer an RRSP to another issuer.
Look for the plan that has the best potential
return for the risk you are prepared to take.
If there are fees involved, take them into account
in comparing the anticipated annual growth. Remember, a front-end load
reduces the amount available for investment.
If for any reason you prefer a short-term
investment, make sure that your plan can be terminated quickly and at
little or no cost.
To compare the earnings on guaranteed type RRSPS,
don't look just at interest rates. Ask for the net annual yield.
The more you know about your RRSP before you
invest, the better.
Under section 146(2) (c.4) of the Income Tax Act,
an RRSP issuer cannot give you any benefits or advantages that are
"conditional in any way on the existence of the plan". Allowable
benefits are generally limited to the provision of administrative or
investment services. Any other allowable benefit must go into your
RRSP, and not to you or to a person with whom you are not dealing at
arms-length.
The Income Tax Act allows you to transfer your RRSP
between issuers at any time. However, if your RRSP investments are
non-redeemable, the issuer may not permit a transfer until the term
expires. The transfer must be made directly from one issuer to the
other.
RRSP Transfers Following Marriage Breakdown
If RRSPs are included in property to be divided
between spouses following marriage breakdown, all or part of an RRSP
may be transferred between the
spouses without income tax
consequences. The transfer must be made pursuant to a court order or a
written separation agreement, and Revenue Canada form T2220 must be
completed to document the transfer.
Funds in most RRSPs can be withdrawn in whole or in
part, depending on the original conditions at the time the plan was
established. The money you withdraw is taxable and will be reported on
a T4RSP by the issuer of your plan.
RRSP funds that have been transferred from a
pension plan are subject to pension legislation. The funds may be in a
Locked-in RRSP or Locked-in Retirement Account (LIRA), depending on
the province. You may be restricted to purchasing only life annuities
with these funds, and under your former pension plan there may be a
minimum age requirement for such purchases. Some pension legislation
allows Life Income Funds (LIFS) or
Locked-in
Retirement Income Funds (LRIFS) as alternatives to life
annuities.
There are special rules for withdrawals from
spousal plans. If you have contributed or contribute to any spousal
plan in the year of a withdrawal, or in either of the two
preceding years, the lesser of the funds withdrawn or the amount you
contributed during this period will be taxable in your name. This is
commonly referred to as the 3-year attribution rule. Spousal
contributions within these 3 years are deemed to be the first spousal
funds withdrawn, regardless of whether the funds withdrawn were
actually contributed prior to the 3 year period. If the amount
withdrawn is more than the amount contributed by you within the 3
years, your spouse declares the excess. To ensure a withdrawal is
taxable to the registered owner and not the contributing spouse,
You Should Wait Until The Third Taxation Year After The Last
Contribution To Any Spousal Plan.
Form T2205 is available at the District Taxation
Offices to help determine who is taxable.
The above 3-year period terminates on the death or
non-residency from Canada of either spouse, or upon the legal
separation of the spouses.
It also terminates if the RRSP funds are
transferred to purchase an annuity. It does apply if they are
transferred to a Registered Retirement Income Fund (RRIF) and more
than the mandatory minimum payment amount is taken from the RRIF in
any of the 3 years. The amount in excess of the mandatory minimum
payment, to a maximum of the contributions within the 3 years, would
be taxed in the hands of the contributing spouse.
Commencing in 1999, an individual may withdraw up
to $10,000 per year from his or her RRSP without immediate taxation,
to finance full-time training or higher education of at least 3 months
duration for the individual or the individual's spouse. Full-time is
defined as at least 10 hours of study per week. Disabled students can
qualify with part-time enrollment. Withdrawals cannot exceed $20,000
over a 4-year period.
It is the financial institution's decision whether
it will allow early withdrawals from non-redeemable investments.
Withdrawals are not permitted from
Locked-in RRSPs .
A tax deduction is not allowed for an RRSP
contribution made less than 90 days before it is withdrawn under this
provision.
You will be requested to repay (to any RRSP) the
amount withdrawn, without interest, in equal payments over a 10 year
period commencing in the year following the last year in which the
student is enrolled full-time, or in the sixth year following the
first withdrawal, whichever is earlier.
Any amount not repaid as requested will be added to
the income of the plan-holder for that year. Special rules will apply
if the RRSP funds are withdrawn and the student does not complete the
educational program.
Before making a withdrawal for education, you
should consider the loss of the compounded earnings on this amount for
the period the funds will be out of your RRSPS. Even if you make the
repayments as requested, there may be a substantial reduction in the
value of your RRSPs at retirement.
You apply by completing Revenue Canada form RC96
with your RRSP issuer. No withholding tax will be deducted from a
qualifying withdrawal. A T4RSP will be issued to you in the year of
withdrawal.
Yes, when you withdraw money from your RRSP,
government regulations require tax to be withheld as follows:
-
10% - on a withdrawal not over $5,000
-
20% - on a withdrawal over $5,000 but not over
$15,000
-
30% - on a withdrawal over $15,000
The amount of tax withheld will be reported to you
on a T4RSP and should be claimed on the "Total income tax deducted
(from all information slips)" line of your tax return. You should
remember that RRSP withdrawals are included in your taxable income, so
the tax withheld will not necessarily cover the taxes payable due to
the withdrawal. On the other hand, if you are not taxable, by filing a
tax return you can receive a refund of the taxes withheld.
If you are a non-resident when you withdraw funds,
non-resident tax of either 15% or 25% will be deducted depending on
the tax treaty between Canada and your country of residence.
No, you must either purchase a retirement income
option or withdraw your funds before the end of the calendar year in
which you reach age 69.
If your
spouse is the beneficiary
of your RRSP, or inherits these amounts under your will, the proceeds
can be transferred to an RRSP, RRIF or annuity for your spouse. He or
she will not have to pay tax on the funds until they are withdrawn. If
your spouse is over 69, he or she can use all or part of the funds to
purchase a retirement income option.
If your beneficiary is a child or grandchild who
was financially dependent on you, there are a number of options
available for continued
tax sheltering.
In all other circumstances, your RRSP funds are
taxed on your final tax return. The result is the same as if you had
withdrawn your RRSP immediately before your death.
Following your death, your legal representative can
arrange contributions to RRSPs for your spouse, and deduct those
amounts on your final tax return. This applies to contributions
for the year of death made within your
RRSP deduction limit. The
contributions must be made within 60 days after the end of the
calendar year of your death.
Each eligible RRSP holder can withdraw, without
immediate taxation, up to $20,000 to be used as part of a down payment
for a qualifying residence. Income tax will not be paid on any portion
of the withdrawal repaid to an RRSP before or during the 15-year
repayment period explained below. The repayments will not be tax
deductible.
For First-Time Home Buyers
The Home Buyers' Plan (hereafter referred to as the
Plan) can only be used by first-time homebuyers. An individual
qualifies as a first-time buyer if, during the year of the
withdrawal(s) under the Plan and the four previous calendar years:
-
the individual did not own a home that was the
individual's principal place of residence, and
-
if the individual is married, while married
during the similar period the individual did not live in a home that
was owned and occupied by the present spouse. However, use of the
Plan by an individual's spouse prior to the marriage does not in
itself disqualify the individual from participating; i.e. if the
home then acquired has not been occupied by the individual during
the marriage. "Spouse" includes a
common-law spouse as
defined for RRSP purposes.
An individual may participate in the Home Buyers'
Plan more than once if all previous withdrawals were repaid prior to
the current year and they otherwise qualify under the above definition
of a first-time buyer.
The first-time homebuyer restriction is waived for
disabled individuals or for a relative supporting a disabled
individual. The disabled individual must qualify for the disability
tax credit. The purpose of the Home Buyers' Plan withdrawal must be to
acquire a home that is more accessible to, or better suited for the
care of, the disabled person.
Definition of Qualifying Residence
To utilize the plan, you must have entered into an
agreement to purchase or construct a home that:
-
is located in Canada;
-
was not previously owned by you or your spouse;
-
will be acquired by October I of the year
following the year of withdrawal;
-
is intended to be occupied as your principal
place of residence no later than one year after its acquisition.
Mobile homes, co-op units, and shares in a
co-operative housing corporation also qualify.
Loss of RRSP Deductions
You will not be able to deduct any portion of an
RRSP contribution that is withdrawn under the Plan within 90 days
after it is contributed. For this purpose, all the contributions ever
made to a particular RRSP are considered to be withdrawn on a first-in
first-out basis. For instance, if you have an individual RRSP worth
$5,000 to which you make an additional contribution, and in less than
90 days you withdraw $5,000 from this RRSP under the Plan, you will
still be able to deduct the contribution.
Reduced RRSPs at Retirement
Before making a withdrawal under this Plan, you
should consider the loss of the compounded earnings on this amount for
the period the funds will be out of your RRSPS. Even if you make the
repayments as requested, there can be a substantial reduction in the
value of your RRSPs at retirement.
Applying for Your Home Buyers' Withdrawal
You apply by completing Revenue Canada form T1036
with your RRSP issuer. No withholding tax will be deducted from a
qualifying withdrawal.
Other Withdrawal Information
-
You can withdraw from any number of RRSPs, with
different institutions, as long as your total withdrawals do not
exceed $20,000;
-
All withdrawals must be within the same calendar
year, except if you make a withdrawal within a calendar year, one or
more additional withdrawals requested by you within that year can be
received in the January following;
-
Withdrawals can be made up to 30 days after the
completion of a purchase;
-
Withdrawals by your spouse from a spousal plan
will not be attributed to you; any amount not repaid by your spouse
will be taxed in your spouse's name;
-
It is the financial institution’s decision
whether it will allow early withdrawals from non-redeemable
investments;
-
A withdrawal is not permitted from a locked-in
RRSP or
LIRA.
Repayments
You are requested to repay (to any RRSP) the amount
withdrawn, without interest, in equal payments over a 15-year period
commencing in the second calendar year following the year of your
withdrawal(s). Repayments made in the first 60 days following a
calendar year can be treated as if they were made within the calendar
year. On your income tax return, you will designate what portion of
your total RRSP contributions are repayments under the Plan, and
therefore not deductible from income.
If you repay less than the specified amount in a
year, you will be taxed in that year on the portion you did not repay.
If you repay more than the amount specified in a year, but not the
whole balance of the withdrawal, your required repayment in subsequent
years will be reduced.
If you die or become a non-resident, the balance
which has not been repaid or taxed will be taxed as a lump sum in that
year. To provide relief from this lump sum taxation, upon your death
your surviving spouse can take over your repayment or alternative
income inclusion schedule.
Retired RRSP Holders
This Plan is attractive to retirees who qualify as
first-time homebuyers. Each qualifying spouse can use up to $20,000 of
his or her RRSP funds toward the purchase of a residence. If you don't
make any repayments you will be taxed, on the amount withdrawn, evenly
over 15 years. However, perhaps you plan to withdraw at least this
amount from your RRSPs in each of those years anyway. These
withdrawals would be taxable. By utilizing this Plan, you get the use
of up to $20,000 now, you pay no additional tax in the year of the
withdrawal or the following year, and then you (or your surviving
spouse) pay the tax with devalued dollars over 15 years thereafter.
RETIREMENT INCOME OPTIONS FOR RRSP FUNDS
Regular contributions to an RRSP will result in a
substantial accumulation of savings. When you desire income, you can
invest your savings in one or more of three retirement income options.
You can have any number of each option.
The Income Tax Act provides three retirement income
options:
RRIFs and life annuities provide an income that can
last for the lifetime of you or your spouse. TCA 90s last until you or
your younger spouse turn 90.
Funds that have been transferred from a pension
plan are usually subject to pension legislation. You may be restricted
to purchasing only life annuities with these funds. Some provinces
have approved Life Income Funds (LIFS) and/or
Locked-in
Retirement Income Funds (LRIFS) for these funds, as
alternatives to life annuities.
There is no longer any minimum required age for the
purchase of a retirement income. You must purchase your retirement
income before the end of the calendar year in which you turn 69. You
can make a contribution to your RRSP for that year as long as you
contribute by December 3 1.
There is no tax consequence when transferring your
RRSP funds to a RRIF or an annuity. You only report for tax purposes
the resulting payments as received. Since the income is spread over
your retirement years, so is the tax liability. If you are 65 or over
in the year, your retirement income qualifies for the
Pension
Income Credit. Also, if both you and your spouse have
separate retirement incomes, this splitting of income may reduce your
taxes.
Neither RRIF nor annuity payments qualify as earned
income. Annuity payments cannot be transferred to an RRSP. RRIF
payments in excess of the
mandatory minimum payment
amount may be transferred DIRECTLY to an RRSP in your name until the
end of the calendar year you turn 69. This might enable you to reduce
the value of a RRIF to deposit insurance limits.
Income tax may be deducted from RRIF payments, but
not annuity payments.
The withholding tax is at the same rates as with
direct
RRSP withdrawals based
on the amount of an individual payment from the RRIF. It applies to
the full amount of any payments taken from your RRIF in the same
calendar year the RRIF is opened. Thereafter, it only applies to the
portion of a RRIF payment in excess of the mandatory minimum payment
amount for the year.
You should convert your RRSP funds to a form of
retirement income if:
-
you need more cash in regular periodic payments,
or
-
you are 65 or over in the year and need the
qualification for the Pension Income Credit, or
-
you will pay a reasonable rate of tax on the
income now, but may be in a higher tax bracket or subject to the Old
Age Security clawback in later years.
The best time to purchase annuities is when
interest rates are at the peak of a cycle.
The mandatory minimum payment from a RRIF cannot be
sheltered from taxation. Therefore, you should take into consideration
that purchasing a RRIF before the mandatory conversion age will
increase your taxable income.
You cannot contribute directly to a RRIF. Funds can
be transferred from an RRSP, another RRIF, a Registered Pension Plan,
or a commuted RRSP annuity.
Some RRIFs are similar to continuing an RRSP, with
the exception that you must take some taxable payments from the RRIF.
You can choose any payment level, as long as the total each year is at
least equal to the mandatory minimum amount. There is no maximum
payment level. With many RRIFs you can fluctuate your payments up or
down above the minimum from year to year. Obviously the higher the
payments you take, the sooner your funds will be depleted. RRIFs can
continue for the lifetime of the holder or their spouse.
Spouse's Birthdate
You can elect to base your RRIF on your
spouse's
birthdate. You must make this election at the time you apply for your
RRIF.
-
If you choose the age of a younger spouse, your
minimum payment will be lower; much lower when your spouse is
younger than 71.
-
If you select the age of an older spouse, your
minimum payment will be higher without triggering withholding tax at
source.
-
If both RRIFs are based on the same birthdate,
when one spouse passes away the survivor can combine two or more
RRIFs into one, rather than having to continue with separate RRIFS.
If you didn't make this election when you applied
for your RRIF, or you marry later, you can transfer your RRIF to a new
RRIF based on your spouse's age.
Minimum Payment
You don't have to take any payment from a RRIF in
the calendar year it is first funded. In subsequent years, there is a
mandatory minimum payment that changes annually based on your age (or
your spouse's age if you have elected) and the total value of the RRIF
at the beginning of the year.
Minimum Payment, Age Less Than 71
If your age (or your spouse's age if you have
elected) is less than 71 at the beginning of the year, the minimum
payment you must receive is calculated by subtracting the age at
January I from 90, and dividing the result into the value of the RRIF
at the beginning of the year. This formula produces an increased
payment each year.
Minimum Payment, Age 71 to 77
If the age at the beginning of the year is from 71
to 77, the minimum payment depends on whether the RRIF was first
funded before or after January 1, 1993.
Investment Choices
RRIFs are available in all the
same types as
RRSPs, including self-directed. The actual investments in a
self-directed RRSP can be transferred to a self-directed RRIF.
Shorter-term investments provide some protection against the future
inflation of interest rates.
Other Questions to Ask
Ask about fees, deposit insurance protection and
estate preservation on any RRIF before you invest. RRIFs are fully
transferable between issuers.
A LIF holds funds locked-in under pension
legislation. It is a non-commutable RRIF to the end of the year the
holder turns 80, by which time the remaining funds must be
used to purchase a life annuity. The same mandatory minimum payments
apply as with a RRIF, however with a LIF there is also a maximum
payment amount per year to ensure a certain remaining percentage of
value at age 80. LIFs are available in all provinces except PEI.
A LRIF holds funds locked-in under pension
legislation. It is a RRIF, non-commutable for life. Conversion
to an annuity is not mandatory, but is an option at any time. The same
mandatory minimum payments apply as with a RRIF, however there is also
a maximum payment amount per year to ensure the LRIF continues for the
lifetime of the holder. It is available only under Alberta,
Saskatchewan and Manitoba pension legislation.
The TCA 90 provides regular periodic payments that
can continue until your 90th year. If your spouse is younger than you,
the TCA 90 can be purchased to continue to your spouse's 90th year. As
an alternative to an annuity with a fixed rate of return, some issuers
offer TCA 90s on which the yield and payments are periodically
adjusted with changes in interest rates.
A life annuity provides a series of regular
payments that will continue for at least the rest of your life, no
matter how long you live. There are two basic forms of life annuities:
Single Life
A single life annuity with no guaranteed period
gives the highest initial life annuity payments, but only for your
lifetime, with no further payments after your death (see Guaranteed
Payments below).
Joint and Last Survivor
This annuity provides payments that will continue
for the longer lifetime of either you or your spouse. The payments can
continue to the last survivor at the full amount, or they can reduce
by any stipulated percentage on your death, or the death of either
spouse. Providing for such a reduction will provide higher payments
while both spouses are alive, and provide a payment stream that
relates to what actually happens to living costs.
Guaranteed Payments
Any life annuity can be purchased with a guaranteed
period to ensure that either you or your beneficiaries get back all of
your original investment (plus full interest if you wish) even if you
live only a short time. The longer the guaranteed period (it can be to
age 90), the lower your payments.
In addition to the reducing Joint and Last Survivor
option described above, you have other options in choosing a payment
stream that may suit your circumstances, including:
Integrated Life Annuity
You can integrate your RRSP annuity with Old Age
Security. You will receive substantially increased annuity payments
until age 65, at which time the payments will reduce by the maximum
OAS entitlement at the time you purchase the annuity.
Indexed Life Annuity
This increasing income option provides annuity
payments that either increase by 1, 2, 3 or 4% automatically each
year, or increase based on the return of a specified group of assets.
This provides you with some protection against inflating living costs.
Choosing this option does, however, substantially reduce your payment
in the early years.
The RRIF and the TCA 90 are designed to repay the
full investment and all earnings to you or your beneficiaries. If your
RRIF is invested in mutual funds or equities, you have the risk of
losses.
With a life annuity, there is a risk that all of
your capital and its earnings may not be repaid to you by the time
payments cease on your death. Purchase of a guaranteed period can
eliminate this risk.
In most provinces your investment in a credit
union, bank or trust company RRIF or TCA 90 will be covered by the
same deposit insurance fund that covers RRSP deposits.
Most life insurance companies are members of a
consumer protection plan that is intended to safeguard their RRIFS, or
the life annuity income, should a life insurance company fail to meet
its obligations.
A RRIF can be terminated and the full value taken
in a lump sum provided the funds are not invested in a non-redeemable
term, and the wording of the contract does not prohibit
commutation. Commutable annuities can also be purchased. You will have
to accept a lower yield on a commutable annuity in exchange for this
option.
The commuted value of a RRIF can be used, without
taxation, to directly purchase an annuity. The commuted value of an
RRSP annuity can similarly be used to invest in a RREF. This
flexibility might be valuable should there be further legislative
changes in the future affecting the retirement income options.
If we ever again experience extremely high yields
on life annuities, as in 1981, having this flexibility would allow you
to convert part or all of your RREF to the high annuity yield for the
rest of your life.
The terminated value of a RREF in excess of the
mandatory minimum payment amount for the year can be transferred
directly to an RRSP in your name provided you are not past the year in
which you turn 69. This enables you to terminate the mandatory income
from a RREF. It also enables you to set up a new RREF based on your
spouse's birthdate.
With a life annuity with no guarantee, the payments
cease upon death. If you purchase a TCA 90 and you die before age 90,
or if you die within the guaranteed period of a single life annuity,
payments can continue to your spouse for the remainder of the
guaranteed payment period, or until his or her death.
With a RRIF, your spouse, if named the successor
annuitant, can take your place without tax consequence and make his or
her own decision on the income and payout term. If your spouse is
named beneficiary, he or she can transfer the balance of your RRIF,
without taxation, to a RRIF or annuity in his or her name, or to an
RRSP if he or she is not beyond 69. The references to spouse above
include
common-law spouse.
If your estate or someone other than a spouse or a
dependent child or grandchild is the beneficiary, the remaining value
at that time (with a life annuity this is the discounted cash value of
the remaining guaranteed payments), will be paid in a lump sum to the
estate or beneficiaries. This lump sum is taxable on your final tax
return.
If your beneficiary is a physically or mentally
handicapped child or grandchild who was financially dependent on you,
part or all of the remaining value can be transferred, without
taxation, to an RRSP, RRIF or annuity in the child's or grandchild's
name, or taxed in his or her name. If the beneficiary is an
able-bodied child or grandchild under 18 who was financially dependent
on you, part or all of the remaining value can be transferred, without
taxation, to a Term Annuity to Age 18, with annuity payments taxed in
the child's name over that period.
All RRSP issuers can get approval to offer RRIFs
and TCA 90s. Only life insurance companies offer life annuities,
although they can be arranged through most insurance agencies.
Because of the wide variety and the fact that the
available yields change frequently, it is wise to obtain the help of a
financial advisor before selecting your retirement income option(s).
The selection of a retirement income option depends
entirely on your personal situation (health, present income and tax
brackets, cash requirements, desired inflation protection or estate
preservation, etc.). You may often select more than one of the options
to create your retirement income package. With a RRIF you can choose
your own investments and change your payment amount from time to time.
Your funds may or may not last for life, depending on the payment
amounts you choose. You can have your RRIF funds fully covered by
deposit insurance.
Life annuities provide an income for life and
require no ongoing decisions. In comparison to a life annuity, the TCA
90 usually provides slightly lower payments in exchange for a long
guaranteed period. Some TCA 90s are also covered by deposit insurance.
The TCA 90 and the RRIF provide good estate preservation; should you
pass away and not leave a spouse, the remaining balance will be paid
in a lump sum to your estate or other beneficiaries.
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