RRSPs RRIFs LIF/LIRA/LRIFs
RRSPs were introduced to allow Canadians to save for retirement in a tax-efficient manner. Currently, 18 per cent of earned income up to the annual contribution limit can be contributed to an RRSP and deducted from total income. Any unused contribution room is carried forward to be used in future years. The tax on RRSP contributions, and on the income earned within RRSPs, is deferred until funds are withdrawn from the plan. Since income during retirement can often be much lower than during an individual’s working years, withdrawals from a registered plan are generally taxed at a lower rate than would otherwise apply.
Selecting the right retirement income option is one of the most important financial and estate planning decisions you'll make. Especially today, when statistics show that Canadians are living longer, healthier lives. It's important to make choices that not only protect your savings but ensure that the purchasing power of your money lasts for decades. A Registered Retirement Income Fund (RRIF) allows you to continue to earn tax-deferred income on a significant portion of your retirement assets while providing you with the flexibility to increase your withdrawal at any time. For these reasons, RRIFs are the RRSP maturity option of choice for many Canadians. A RRIF is very much like an RRSP in reverse. While an RRSP helps you save for retirement, a RRIF is designed to provide an annual income in the form of withdrawals from the plan during your retirement. Like an RRSP, the assets in the RRIF continue to be tax sheltered until withdrawn. With a RRIF you continue to control how your funds are invested and have access to all the same investments you had with an RRSP.
While staying with one employer for your entire career used to be common, recent trends indicate that most of us will work for four or five different employers prior to retirement. If you belong to a vested pension plan (where the employee has an absolute right to the entire amount of money in the account), each job transition may provide you with an opportunity to transfer your pension to a locked-in registered plan. At retirement, these funds would be rolled into one or more of the locked-in maturity options designed to provide you with a lifetime income. For all provinces and territories (except Quebec) the pension legislation that will govern your locked-in plan is the legislation of the jurisdiction where you were employed while the pension benefits were being earned. If you are employed in Quebec, regardless of where you live, your plan will be governed under Quebec legislation. Pension plans for employees in certain industries that are "federal undertakings”, such as banking, communications and transportation industries have resulting locked-in plans that are governed by the Federal Pension Benefits Standards Act. Depending on the applicable pension legislation, the locked-in alternative to an RRSP is referred to as a Locked-In RRSP (LRSP) or a Locked-In Retirement Account (LIRA). The purpose of these plans is to ensure that locked-in funds will be used to provide you with a lifetime retirement income. At retirement or at the plan maturity, the funds must be rolled from your LRSP/LIRA into one or a combination of a life annuity, or, if available in your province, a Life Income Fund (LIF), Locked-in Retirement Income Fund (LRIF) or a Prescribed Registered Retirement Income Fund (PRIF). If you’re a member of a provincially regulated pension plan, you may only transfer the commuted pension entitlements to a LIRA or LRSP approved by the province where you were employed. Subsequent transfers of these locked-in funds are subject to similar restrictions, even if the former employee’s province of residence has changed. For example, funds held in an Ontario LIRA may only be transferred to another LIRA, LIF, LRIF, life annuity or registered pension plan, each of which must be governed by Ontario pension legislation. Similarly, a federally regulated plan can only be transferred to another federally regulated plan. There are numerous regulatory requirements surrounding locked-in plans which should be considered. We can review your personal situation to outline your options based on the governing jurisdiction.
If you have one or more locked-in accounts, consider consolidating them into one account if they are regulated by the same provincial or federal legislation. Over the years, positive changes have been made in numerous jurisdictions making it easier for you to access locked-in monies. We suggest consulting us to see if your plan can be unlocked under certain conditions such as small amounts, shortened life expectancy, non-residency or financial hardship among others.
Kubicek Carli Wealth Management Group