Have questions about registered plans? Maybe you'll find the answers here! Below are the some of the questions (classified according to subject) submitted by visitors to our site, as well as our experts' replies.
Registered Retirement Income Fund (RRIF)
At what age is it financially wise to take out a RRIF? Is it possible to invest in a RRIF for future use? How does a RRIF work?
From a tax point of view, it is advisable to keep your funds registered as long as possible. If you have sufficient revenues from non-registered funds (i.e from non-registered savings, salary income , rental income, etc.), you should wait to convert your registered savings into a RRIF until you are required to do so by law, that is by December 31 of the year in which you turn age 71.
Regarding the mechanism of a RRIF, please find below the main features and advantages of a RRIF. More information is available in the RRIF section of our Web site.
Main Features
- A registered retirement income fund (RRIF) is one of the options available when you are required to start withdrawing from your RRSP or when the RRSP expires upon your 71st birthday.
- You must withdraw a minimum amount from your RRIF each year and declare it as income. The withdrawal amount is determined by government regulations on the basis of your age and the balance in your RRIF.
- You can make lump sum withdrawals from a RRIF at any time, provided that the investments cashed in have matured or are liquid.
- Withdrawals may be made monthly, quarterly, or annually and may be modified (amount or frequency) if your needs change.
- All Desjardins Financial Security investments are RRIF eligible: guaranteed investment certificates, stock-indexed deposits, segregated funds, mutual funds, shares, bonds, and deferred annuities.
- No taxes are deducted at source if you withdraw only the minimum amount prescribed by law.
Major Advantages
- The balance of a RRIF can grow tax-free for many years after the annuitant retires.
- You need only withdraw the minimum required by law if economic conditions are unfavorable, then convert your RRIF into an annuity certain or a life annuity when interest rates are higher.
- In case of death, your RRIF can be transferred to your heirs, who can customize it for their own needs.
- Your RRIF can hold up to 100% foreign content.
You may want to contact one of the financial advisors from our Desjardins Financial Security Independent Network associates. They have the knowledge and software to make forecasts and determine the program best suited to your needs.
We therefore invite you to complete the form "Please have a representative contact me".
I'm 57 years old, and have been retired for three years. I want to convert my $70,000 RRSP into a RRIF and start taking out funds right away. I don't want to have to pay someone for investment advice. I'm a diabetic, overweight, and have a slight heart problem. What could my $70,000 RRIF provide in terms of monthly income?
A registered retirement income fund (RRIF) is an account into which RRSP assets are transferred at retirement; establishing a RRIF is a logical step to take after collapsing your RRSP.
If you transfer the $70,000 from your RRSP to a RRIF before December 31, 2008, you'll have to make a minimum withdrawal for 2009 equal to 3% of the balance at January 1, 2009 (assuming you're still 57 at that time); this will give you about $2,100 for year, or $175 a month.
You also have other options: you can make a withdrawal in 2008, or take out more than minimum in 2009. Subsequently, the minimum withdrawal will be determined on January 1 of each year in keeping with your age. As a rule, you can always withdraw more than the minimum, but never less.
Below are the main advantages of a RRIF:
- Tax-free investment income
- Minimum annual withdrawal established by law
- Variable income: subject to the annual minimum, you decide how much you want to withdraw, and you can change that amount at any time
- Option of lump-sum withdrawals
- And you maintain full control over your capital!
You can also choose saving product RRIF's you like best:
Feel free to contact a Desjardins Financial Security Independent Network service advisor. Our experienced staff have the knowledge and software to make expert forecasts and find the program that best meets your needs. You can also consult the RRIF section of our Web site.
Home Buyers' Plan (HBP)
My husband and I took money out of our RRSP under the Home Buyer's Plan (HPB) to purchase a house. Do we both have to repay the amount withdrawn?
You must both repay the amounts withdrawn. It must be repaid over a period of 15 years, the annual repayment being 1/15 of the total amount withdrawn.
Contributions designated for repayment purposes under the Home Buyers' Plan (HBP) must be deposited into the RRSP of the individual who took advantage of the HBP, not the RRSP of his or her spouse. In other words, if you made a withdrawal from your RRSP under the HBP, any contributions you make to your spouse's RRSP, or those your spouse makes to your RRSP, cannot be designated as HBP payments. For more information, consult the Home Buyers' Plan section.
Would there be any advantage in taking out a personal loan to increase the amount I can withdraw from my RRSP under the HBP?
Your question has more to do with financial planning than taxation. Before taking out a loan, you should consider factors such as the loan amount, interest rate and term, as these payments will be added to your mortgage and Home Buyers' Plan (HBP) payments.
You should also consider your RRSP deduction limit and marginal tax rate. Borrowing to invest in an RRSP will generate a tax savings that depends on your marginal tax rate, which in turn is based on your taxable income. Financial institutions often imply that the RRSP- contribution tax refund is always 50%, whereas, in Quebec, the maximum marginal tax rate is 48.22 %. To obtain such a refund, your taxable income would actually have to exceed $120,880! To calculate the tax savings applicable in your case, use our "Tax Savings - RRSPs" simulator.
By way of illustration, in Québec if your taxable income is between 37,179 $ and $58,595 $, your tax savings will amount to approximately 38.37% of your contribution.
You should also think about other factors, such as rates applying to mortgage interest and the Canada Mortgage and Housing Corporation's mortgage insurance (that is, if you don't have the basic 25% down payment required by the CMHC).
If you intend to contribute to your RRSP and use this contribution to purchase a home, I suggest you check out the conditions governing the relevant tax deductions.
For more information on the Home Buyers' Plan, please consult the "Home Buyers' Plan" section of the Canada Revenue Agency Web site.
Is it possible to use RRSP or DPSP withdrawals to buy a first home without going through the HBP?
While it's always possible to make withdrawals from an RRSP or a DPSP, provided certain requirements are met (e.g.: deadlines and other investment conditions), such withdrawals have tax implications.
The amounts withdrawn will be taxable and subject to deductions at source. You'll therefore have a smaller net down payment.
You should also bear in mind that, as such amounts are taxable, they'll increase your taxable income in the year they're withdrawn, and could have repercussions on any tax credits for which you're eligible.
Registered Retirement Savings Plan (RRSP)
Age
How old do you have to be to contribute to an RRSP?
There's no minimum age for contributing to an RRSP. The only condition is that you have earned income as defined by law, or income eligible for a transfer into such a plan.
Can someone still invest in an RRSP after they turn 65?
Yes, you can invest in a registered retirement savings plan after age 65. To contribute, you must have "earned income", and contributions cannot exceed established limits. "Earned income" is basically income from employment or business income, and does not include amounts received from a registered retirement plan, an RRSP, or other retirement plans.
The year you turn 71 is the last year that contributions can be made to your RRSP. If you're contributing to an RRSP under which your spouse is the annuitant, your spouse must also be 71 or under.
Advantages of an RRSP
I've heard that contributing to an RRSP can reduce my taxes, among other benefits. Is this true?
Contributing to an RRSP helps many people pay less in taxes, because contributions can be deducted from income. When taxable income is reduced, taxes decrease as well.
Contributing to an RRSP also lets you take advantage of certain tax credits. Many tax credits, as well as the sums to which you may be entitled under various social programs, depend on your net income. Since RRSP contributions reduce that income, you may qualify for credits or programs to which you wouldn't otherwise be entitled.
Contribution Room
I'd like to contribute to an RRSP, but I'm not earning a salary.
Luckily for you, non-salaried workers can also contribute to an RRSP. If you receive eligible income, such as commissions, tips, alimony income, net rental income or a disability pension from the Canada Pension Plan, you can also get in on the numerous advantages n RRSPs offer.
How can I find out the maximum I can contribute to my RRSP?
The amount is indicated on your annual notice of assessment from Revenue Canada. You can also call Revenue Canada at 1 800-267-6999.
If I can't contribute to my RRSP in a given year, do I lose this right for good?
Since 1991, Canadians have been allowed to accumulate unused "contribution room," i.e., the amount they've been unable to contribute from that year onward. At any point between now and the year you turn 71, you can contribute the total of this unused contribution room to your RRSP (and, of course, get the attendant tax savings as well).
Is it best to make my maximum allowable RRSP contribution every year?
Taking out RRSPs can really save you a lot on income tax. The rule of thumb is that the money you invest in an RRSP will double every ten years, assuming a 7% yield. So it's best to contribute the maximum every year, and begin as soon as you start working.
By contributing the maximum, you'll reduce your family's net income and increase your chances of qualifying for certain social benefits that are determined by net income.
My husband has $2,000 in unused RRSP contribution room that he intends to make full use of. I have $6,000 in contribution room, and am planning to put $3,000 of that into my RRSP myself; my husband will take care of the rest. When filing his income-tax return, which amount can my husband enter as an RRSP contribution: $2,000 or $5,000?
Spouses can contribute to each other's RRSP. Such contributions reduce the contribution room of the contributor, not the annuitant. In your case, the contributor would be your husband, and he would have unused contribution room of $2,000. With spousal RRSPs, contributions made by one spouse must be entered as having been paid into the other spouse's plan, and are deductible for the individual who made them.
Given that your husband plans to contribute to his own RRSP to take advantage of his unused $2,000 room, he won't be able to pay into your RRSP as a contributing spouse, because any such contribution would be considered excess and might be subject to special taxes. The maximum amount your husband should contribute, and which he can then deduct, is therefore $2,000.
Converting an RRSP into Retirement Income
I'm 71 and have to convert my RRSP into a RRIF or life annuity. What should I do?
The life annuity will guarantee you an income for life. Your annuity payments will be larger if you buy the annuity when interest rates are high. With a RRIF, you have access to a variety of investment options that can provide you with higher returns, but at greater risk. You also run the risk that your savings will be depleted before you die.
Establishing an RRSP for a Spouse or for Someone Else
I'd like to set up an RRSP for my grandchildren. Is this possible?
Grandparents can contribute to their grandchildren's RRSP, although the RRSP holder (the grandson or granddaughter) must have "earned income"; otherwise, he or she can't contribute. However, under the Income Tax Act, if the plan holder is aged 18 or over, he or she may contribute an excess amount of $2,000 to an RRSP. In some circumstances, therefore, it is possible to have an RRSP without "earned income".
Grandparents may give an 18-year-old grandchild $2,000 in cash, which he or she can then invest in an RRSP. However, the grandparents will not be entitled to a tax deduction. Once the child has "earned income", he or she will be able to claim an offsetting deduction for the contribution. "Earned income" includes employment income, business income and rental income.
The advantage of this approach is that the income produced on the investment held through a grandchild's RRSP is tax-sheltered.
I contribute to my employer's RRSP and to a spousal RRSP. Does this mean I'm entitled to $20,000 twice?
Unfortunately, the answer is no. The maximum contribution is $20,000 per individual (for 2008). Contribution limits are based on a person's income-that is, 18%, for a maximum of $20,000. You may have RRSPs at several institutions, but this amount doesn't change.
Can I contribute to my spouse's RRSP even if we aren't legally married?
Yes. The Income Tax Act defines spouses as two persons, regardless of sex, who've lived together for at least one year, or less than one year if they are the natural or adoptive parents of a child. (These individuals are not considered spouses, however, after a separation of 90 days or more.)
What is the spousal RRSP three-year rule?
This rule determines whether the planholder or contributor will add the amount withdrawn from the spousal RRSP to his or her income, and in what proportion. It's important that contributions be made and kept in the form of a spousal RRSP for a period of three consecutive "December 31st's" before any withdrawals are made, so the contributor isn't taxed.
The three-year rule is also aimed at contributions made during the three preceding "December 31st's," regardless of the financial institution involved.
If I contribute to my spouse's RRSP, to whom does the amount invested belong-him or me?
When you contribute to a spousal RRSP, the sums invested belong to your spouse, but you get the tax deduction.
Can I transfer an RRSP from my name to my wife's name even if she isn't earning a salary?
It isn't possible to transfer anything from your RRSP to an RRSP for which your wife is the annuitant without immediate tax implications. Broadly speaking, the only such direct transfers allowed, without immediate tax repercussions, are those made because the legal or common-law marriage has broken down or the spouse who owns the RRSP has died.
However, if you have an RRSP deduction limit for the current taxation year, you can contribute to a spousal RRSP provided your spouse was 71 or under on December 31 of that year, and deduct that contribution from your taxable income for the same year.
The year a withdrawal is made from an RRSP, the amount withdrawn will be included in computing your wife's taxable income (this withdrawal, however, must be made after the second calendar year following that in which the contribution was made).
Foreign Content
Why should my RRSP have foreign content?
Investments in foreign corporations give you a chance to take advantage of economic growth in other countries, thus diversifying your portfolio and reducing the attendant risks.
How to Save for Retirement
If I wait for an inheritance to take advantage of my unused contribution room, I may never get to use it!
There are other ways to take advantage of unused contribution room. For example, every year you can borrow an amount equal to a portion of that room, and use the money you save on taxes to repay part of the loan.
You can also make periodic RRSP contributions or increase your current contribution amount. With time, you'll take advantage of all your unused contribution room.
How do I plan for my retirement if I can currently afford to put away between $1,000 and $1,500 a year?
It's difficult for most of us to plan and save. How can we tell what the future holds, or how much we'll need to live on? The lifestyle you want for your "golden years" determines the amount you'll have to put away. Usually, the goal for retirement is to maintain between 60% and 80% of the purchasing power of your current income.
How do you do this? First, don't worry. Your retirement income can come from various sources, such as a pension plan from work, government pension plans, and your own savings.
The government and your employer (if applicable) will provide some retirement income, but it may not be enough. That's why you have to do your part. You can set up your own retirement savings program through individual plans or accounts.
To set up an effective investment and savings strategy, you have to get a realistic idea of your financial situation. What are your monthly expenses, and how much do you currently have put by? How much do you plan to withdraw from your sources of income at retirement? How much should you save in the meantime to have enough at retirement? Below are a few helpful strategies in this regard.
Start investing early in life: Time is the best way to make an investment appreciate in value. The sooner you start, the longer your money has to grow. This will increase your chances of reaching your retirement-investment goals. Here is an example illustrating this principle:
Joanne, who started investing in an RRSP at age 30, invests $1,500 a year in a plan with a 6% annual rate of return. By age 60, she'll have put away $45,000, and her plan will be worth $125,702.52.
However, Jack waited until age 40 to start contributing to an RRSP. To make up for lost time, he puts $3,000 a year away into a plan with a 6% annual rate of return. At age 60, he will have put away $60,000 into the plan, but it will be worth only $116,978.18. At retirement, the value of Joanne's plan is higher than Jack's, even though she contributed $15,000 less, for the simple reason that she started contributing to her RRSP sooner.
Invest regularly: Developing a profitable financial strategy requires planning and discipline. One of the best and least painful ways of doing this is to put aside a percentage of your income each month, thereby gradually building up your retirement capital.
RRSP Withdrawals
Can I withdraw money from my RRSP more than once a year? If so, would a few $5,000 withdrawals, rather than a single, larger withdrawal, help me reduce the total deducted at source?
You can make several RRSP withdrawals in a given year. Small, separate withdrawals will let you minimize source deductions, as the latter depend on your income bracket-which, in turn, varies in accordance with the amount withdrawn. However, try not to spend this money, because your tax bill won't be reduced, just deferred!
Is it possible to use RRSP or DPSP withdrawals to buy a first home without going through the HBP?
While it's always possible to make withdrawals from an RRSP or a DPSP, provided certain requirements are met (e.g.: deadlines and other investment conditions), such withdrawals have tax implications. The amounts withdrawn will be taxable and subject to deductions at source. You'll therefore have a smaller net down payment. You should also bear in mind that, as such amounts are taxable, they'll increase your taxable income in the year they're withdrawn, and could have repercussions on any tax credits for which you're eligible.
What Will Happen to My RRSP When I Die?
If I die, who'll get the money from my RRSP?
If you take out your RRSP with an insurance company, plan proceeds will be excluded from your estate if you appoint a beneficiary. If you die, the capital will devolve to the beneficiary named in the contract, unless this beneficiary is subsequently revoked.
What happens to my RRSP when I die?
From a taxation standpoint, if you've transferred your RRSP to your legal or common-law spouse in a will or by some other means, he or she will be taxed on the total amount or a partial amount of his/her choosing. The balance then becomes taxable for the estate. However, in order to be able to defer taxation of the RRSP amounts received, your survivor will have to transfer them to his/her own RRSP the same year as you die, or within 60 days of year-end.
The same is true if the RRSP is bequeathed to a child or grandchild who is mentally or physically infirm and financially dependent on the deceased.
Other children who are still dependent on the deceased will be taxed on any amount received. However, for heirs under 18, it's possible to stagger taxes by purchasing an annuity maturing no later than their 18th birthday.
When to Declare RRSP Contributions
Is there a penalty for deducting RRSP contributions from my income in a year other than the year the contributions were made?
No, because you aren't making an excess contribution. This type of deferral is allowed, so there are no penalties as long as the amount does not exceed the maximum established-i.e., the total of your unused contribution room and your maximum contribution for that year.
Example:
You have unused contribution room in the amount of $23,000. An inheritance or the sale of an asset provides you with $27,000 in extra income. You may contribute $23,000 to your RRSP and deduct part of this contribution from your taxable income over each of the next few years. During this time, the income from the $23,000 in capital will not be taxed.
Why Contribute to an RRSP?
Why invest in an RRSP, since I'll just have to pay taxes on it as soon as I withdraw the funds?
While tax deferral is the main feature of RRSPs, these plans also provide several other tax and financial advantages. When you contribute to an RRSP, Revenue Canada actually funds part of your retirement savings. When you make an RRSP contribution, you not only enjoy immediate tax savings, but shelter your investment income from taxes as well. With advance planning, you can also arrange to cash in your RRSPs when your marginal tax rate is lower than what it was at the time of contribution.
Example:
Lori and Paul's marginal tax rate is 42.2%, and they've invested their money at 5%. Lori's decided to save for her retirement through an RRSP. Her yearly RRSP contribution is $3,000, and the resulting tax savings amount to $1,266. Paul, on the other hand, has decided to set aside the same amount of money as Lori-i.e., $1,734 ($3,000 - $1,266)-but in savings vehicles other than RRSPs.
Here's the situation after 30 years:
Lori's accumulated $209,282.37 and Paul, $83,384. If Lori decided to withdraw the proceeds of her RRSP all at once, she'd have $108,366.41 after taxes. Let's assume that Paul and Lori each have a gross income of $20,000 at retiremen from sources other than an RRSP. To enjoy a total net revenue of $25,000, Paul will have to withdraw $8,329 from his savings. At that rate, he'll have exhausted his savings in 11.5 years. Lori, on the other hand, will be able to increase her net revenue to $25,000 for a little over 31 years before she uses up her RRSP.