*There are so many types of investment plans available, all with
their own acronyms, that it can become overwhelming for your
clients.
Todays presentation will bring clarity on the features of each
type of plan, their impact on their owners taxes and how they are
typically used.
There are other types of investment plans, such as IPPs and RCAs
for wealthier clients but for the purpose of this presentation, we
will focus on the more common plans that are accessible by the
middle-market.*To first start making sense out of all these plans,
we can categorize them in the following way.CLICK and CLICK
Some plans are primarily built for accumulation of wealth: RRSP
and spousal RRSP, as well as LIRA and Locked-in RRSP. This doesnt
mean that withdrawals arent possible from these plans, but since
they are primarily used for retirement savings, they have
corresponding investment vehicles that are better suited for the
withdrawal phase, at retirement (CLICK and CLICK): the RRIF and
LIF.
As you can see, money that goes into a RRIF can only come from
an RRSP or Spousal RRSP (or a transfer from another RRIF). Same
thing with the LIF, the money can only come from a LIRA or LI-RRSP
(or a transfer from another LIF).
CLICK and CLICKThe TFSA and non-registered plan are used both
for accumulation and then withdrawals. There isnt a corresponding
plan specifically for withdrawals linked to these investment
vehicles; you just take the money directly out of these plans.
One thing that all these investment plans have in common is that
the money can be used to purchase a life annuity which pays a
guaranteed amount to the annuitant for life. CLICK and CLICK. Once
a life annuity is in place, it cannot be changed or
transferred.
Lets look more closely at the features of each vehicle and how
they are used.*Most everybody has heard the terms RRSP and TFSA.
But hearing about them through various advertisements doesnt make
people understand how they work.*While your client probably has
various investment goals, the RRSP is primarily used to save for
retirement.
There are two main benefits to the RRSP:Contributions made are
tax deductible so there is an immediate tax savings in the year of
contribution.Investment income is tax-sheltered resulting in a
higher net return than money invested in the same investment
options within a non-registered account.
Because of the tax benefits linked to an RRSP, there is a limit
to how much an individual can contribute. The easiest way to know
your clients RRSP limit is to look at his latest Notice of
assessment from CRA. If you client had unused contributions in past
years, they are carried-forward and added to the annual limit so
total RRSP room in a given year for some clients can be quite
large. Excess contributions up to $2,000 over the limit is
tolerated but no tax deduction is allowed on that excess.
Contributions over and above that $2,000 extra will result in a 1%
per month penalty on the amount exceeding the $2,000 excess.
Since RRSP contributions are tax-deductible and investment
income is tax-sheltered, CRA wants to ensure it recuperates taxes
on those amounts. Therefore, withdrawals are fully taxable and you
cannot maintain an RRSP later than December 31st of the year you
turn 71. If the RRSP is maintained past that age, CRA will assume
it has deregistered and will tax the entire amount in the RRSP.
*Individuals in a higher tax bracket will benefit more from the
tax deduction they get on RRSP contributions as their tax savings
will be higher.*Withdrawing money from an RRSP in a year when you
earn income is not recommended because the withdrawal will be added
to your taxable income. Money in an RRSP should be kept there for
retirement.
*
Limit is not per account. It is applied to the total TFSA
contribution, no matter how many TFSAs in various financial
institutions the client may have.
*Both the RRSP and TFSA offer tax-sheltered investment income.
The net result of this benefit is preferable to that of a
non-registered plan.*
Because of its tax benefits, TFSAs are preferable to
non-registered plans and can be used for many different financial
objectives, contrary to an RRSP which is mainly for
retirement.*
Lets summarize (slide)*
When it comes to saving for retirement, which vehicle is better,
the RRSP or the TFSA? This is a question that comes up a lot.
Because RRSP contributions are tax deductible, the net cost of
investing is lower than in a TFSA. However, withdrawals from the
TFSA is not taxable making those withdrawals more interesting than
RRSP withdrawals.
One guideline you can use is this (read slide).
If you have clients that are very low income earners and they
will probably depend on GIS pension, the TFSA is better as
withdrawals are not considered as income, which is the case with
RRSPs, so they wont affect the GIS amount (i.e. clawback).*With a
spousal RRSP, the contributor benefits from the tax deduction and
the amount he or she can contribute is based on his or her own RRSP
limit. So, if the contributor has $10k in RRSP room and puts $4k in
his own RRSP, he can put up to $6k in the spousal RRSP.
The annuitant is the owner thus it is the annuitant who decides
how to invest the money, who to put as beneficiary and when to make
withdrawals. The annuitant will be the one who is taxed on
withdrawals, unless the attribution rule applies.
Attribution RuleIf a withdrawal is made in the same calendar as
the last contribution or the two following years, attribution rule
applies and withdrawal is taxed in hands of contributor.
*Employer pension can be split at any age.
*As you can see in this example, splitting income can be very
beneficial. In this case, the couple saves $3,350 annually by
splitting income. Anytime youre helping a couple plan their
retirement, keep income splitting in mind.***
After accumulating wealth within an RRSP, the RRIF is a vehicle
used to withdraw that money. Money that goes into a RRIF must come
from an RRSP or spousal RRSP. In can also be a transfer from
another RRIF. But you cant for example take money from a savings
account and invest it in a RRIF.*
*
For example, if annuitant is aged 65 on Jan. 1st, the minimum
amount he will have to withdraw is 4.00% of the market value at
Jan. 1st [1 / (90-65)] = 0.04
At age 70, it would be 5.00%.**
Locked-in plans were created to permit individuals to control
and invest their money that sits in a former employers pension
plan. A few decades ago, this was not an issue since people worked
for one employer all their life. However, ever since people have
started changing employers, many are not interested in leaving
money in their former employers pension plan. They prefer
transferring that money into an individual plan.
Locked-in plans such as the LIRA and LI-RRSP fall under pension
legislation. The locked-in provision which limits the flexibility
in withdrawing money is there to respect the spirit of the law that
applies to pension plans. The law is there to prevent individuals
from withdrawing too much too fast; the money should last for all
of retirement. *
The details of these specific transactions are beyond the scope
of this presentation. Before making any recommendations to your
clients regarding these transactions, you should familiarize
yourself with the rules that apply. Each province has its own
rules.
The two links on the slide are for the province of Ontario and
the Federal legislation for plans that fall under the federal
jurisdiction.
*
The LIF is to a LIRA and LI-RRSP what the RRIF is to an RRSP.
Money going into a LIF must come from a LIRA or LI-RRSP, or even a
defined contribution pension plan - CLICK
Money can also be transferred from an existing LIF.*
On the last point, if a client moves to Ontario from New
Brunswick, and he had money in his former employers pension plan
which was registered under the New Brunswick pension legislation,
the money can be transferred to a New Brunswick LIRA, even though
the client is a resident of Ontario.*
The details of these specific transactions are beyond the scope
of this presentation. Before making any recommendations to your
clients regarding these transactions, you should familiarize
yourself with the rules that apply. Each province has its own
rules.
The two links on the slide are for the province of Ontario and
the Federal legislation for plans that fall under the federal
jurisdiction.**On the last point, capital losses are not recognized
in any other investment plans that we discussed previously. But
most people dont invest in the hopes of realizing capital
losses.
**Money inside any of these plans can be transferred to purchase
a life annuity.**In our next session, we will look more
specifically at what role a life annuity can play in an individuals
retirement plan.**
