What is an RRSP?
A Registered Retirement Savings Account is similar to an account you open at your favourite bank. But unlike a typical savings account, an RRSP acts like a tax shelter that provides you with a powerful incentive to save money for your retirement years.
You can open an RRSP at many financial institutions including: banks, trust companies, life insurance companies, credit unions, mutual fund, and stock brokerage firms. But unlike a savings account, an RRSP is designed to hold a number of investments such as stocks, bonds, and other popular securities including mutual funds, segregated funds and GICs.
An RRSP is generally available to you if you have qualifying income. (you can contribute annually 18% of any earned income [minus any pension adjustment]) At this point you can back-fill any contribution room that you may not have contributed in past years.
Once you deposit funds into an RRSP, any growth or income earned on the underlying investment will not be taxed until you withdraw that money.
In addition, you can claim tax deductions for contributions you make to your RRSP.
But since you received a tax deduction when you contributed funds to the RRSP and the funds accumulated on a tax-free basis, if you decide to withdraw those funds, any amount withdrawn will be regarded as taxable income by the government and will be subject to tax in the calendar year you receive it.
If you have not withdrawn your RRSP’s by the time you turn age 71, you would then use your accumulated savings to purchase a retirement annuity or open a registered retirement income fund (RRIF).
What is a RRIF?
A RRIF provides a high level of control over the investments in your retirement plan, the advantage of tax-free growth of assets within the plan, as well as maximum flexibility in establishing an income stream. RRIFs come in a number of shapes and sizes.
The first decision is income
The first thing you will need to determine is how much income you need or want. This decision will have the greatest impact on the longevity of your money (If you spend too much too fast, you will run out of money.) Even if you don’t need or want the extra income, you have the minimum income rules to contend with.
You can tailor your income to your needs, subject to minimums imposed by the federal government. If you need steady monthly, quarterly, or annual income, it’s available. If you require a large lump sum for a major purchase, travel, or some other purpose, that’s available too.
RRIFs offer investment flexibility. You can hold the same investments that are eligible for an RRSP.
What will happen to your RRIF when you die?
You can leave your remaining RRIF assets to your heirs upon your death by designating the proper beneficiary. Not all other retirement income options provide for this. Naturally, your desire to provide an estate for your spouse, beneficiaries or charities may have an impact on how you set up your RRIF. While this may or may not be an issue, income and investments should remain the priorities.
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