Registered Investment accounts are given a tax-advantageous status by the government. These investments include RRSP’s, RESP’s, RIF’s, LIF’s, LIRA’s, LRSP’s, IPP’s and RCA’s.
Registered Retirement Savings Plan (RRSP)
An RRSP is a financial account for holding savings and investment assets. Pre-tax money is placed into an RRSP and grows tax-free until withdrawal, at which time it is taxed at the marginal rate. All deposits are tax-deductible at the contributor’s marginal tax bracket.
Registered Education Savings Plan (RESP)
An RESP is an investment fund for parents or guardians to save for a child’s post-secondary education. They provide access to the Canada Education Savings Grant, and so long as the funds are spent on higher-education related tuition or expenses, the investment gains are not subject to income taxes.
Retirement Income Fund (RIF)
A RIF uses the savings from your RRSP to provide you with a steady, reliable source of income during retirement. Holders of RIFs are required to withdraw a minimum amount of retirement income from their RIFs annually. RRSP’s must be converted into a RIF within the year the owner turns 71.
Life Income Fund (LIF)
A LIF is a type of registered retirement income fund offered in Canada that can be used to hold locked-in pension funds as well as other assets for eventual payout as retirement income. A life income fund cannot be withdrawn in a lump sum, and has minimum and maximum annual withdrawal amounts just like RIFs. Just like RIF’s, a LRSP or LIRA must be converted into a LIF within the year the owner turns 71.
Locked-In Retirement Account (LIRA)
A LIRA is a type of registered account meant to accumulate retirement savings. A person can transfer the amounts that are in a provincial pension plan into their LIRA. Unlike regular RRSPs, the amounts in a LIRA are locked-in and can only be used for retirement income. One can hold a LIRA until December 31st of the year they turn 71 before it must be converted to a LIF.
Locked-In Retirement Savings Plan (LRSP)
An LRSP is similar to a LIRA, but regulated under federal legislation. For example, one can move pension funds from a provincially regulated employer-sponsored pension plan into a LIRA and for those set up under federal regulation, would transfer the funds into an LRSP. LRSPs must be converted into a LIF within the year the owner turns 71.
Individual Pension Plan (IPP)
The IPP is an RSP intended for one person. This plan is sponsored by an incorporated business for its owners and executives, generally reserved for “connected employees”, meaning employees who hold 10% or more shares in the business. It is a defined benefit plan, meaning you know in advance how much you will receive upon retirement. You do not pay taxes on contributions made for you by the sponsors, only on the amounts you withdraw.
Retirement Compensation Arrangements (RCA)
An RCA is a non-registered plan between an employer and employee or group of key employees to provide benefits upon retirement, termination, or a change in service. For the employee, it is a supplemental pension which can help private business owners and executives overcome the income gap they face in retirement.
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Frequently Asked Questions
Your RRSP contribution limit for 2019 is 18% of earned income you reported on your tax return in the previous year, up to a maximum of $26,500. Note you may also have carry-forward room from previous years.
Any and all withdrawals from your RRSP are immediately subject to withholding tax and are fully taxable to you in the year of the withdrawal. In Ontario, if you withdraw up to $5,000, the withholding tax rate is 10%; if you withdraw between $5,001 and $15,000, the withholding tax rate is 20%; and if you withdraw more than $15,000, the withholding tax rate rises to 30%. This withholding tax is held by the investment company and remitted to CRA on your behalf.
-Contributions are tax deductible.
-Savings grow on a tax deferred basis.
-You can convert your RRSP (Savings Plan) to an income vehicle when you retire.
-You can borrow from your RRSP to buy your first home or pay for your education and repay this amount without incurring a tax liability if done so within CRA guidelines.
With the federal government’s Home Buyers’ Plan, you can use up to $35,000 of your RRSP savings ($70,000 for a couple) to help finance your down payment on a home. To qualify, the RRSP funds you’re using must be on deposit for at least 90 days.
A RESP stands for Registered Educational Savings Plan. A RESP is a savings vehicle (tax-free upon withdrawal) for parents to help save money for their children’s post-secondary education.
Each year the government will match your contribution by 20% per child up to $500. You’ll need to contribute $2,500 a year to reach your eligible $500 grant. The RESP can only be withdrawn for approved post-secondary education. In the event the child does not attend post-secondary education, the government contributions must be returned with any growth.
An IPP is a defined pension plan established by a company for one individual (or family). IPP’s must be established by an incorporated entity and is a useful retirement strategy for business owners.
An RCA is an arrangement between an employer and employee under which the employer or employee makes contributions to a custodian of the RCA trust. The custodian may subsequently make distributions to the employee upon retirement, loss of office or employment, or substantial change in the services the employee provides. You must deduct a 50% refundable tax on any contributions you make to a custodian of the arrangement and remit the amount to the Receiver General to hold in trust.