Variety of investment products
- RRSP (registered retirement savings plan)
- NRSP (non-registered savings plan)
- TFSA (tax-free savings account)
- RRIF (registered retirement income fund)
- LIF (life income fund)
A savings plan that’s registered with the federal government and provides the following tax advantages.
Earnings on the investments in an RRSP aren’t taxed when earned. Instead, they’re "tax-deferred," meaning investors don’t have to pay tax until earnings are withdrawn from the plan. Investors earn income on money they’d otherwise have paid out in tax. Over time, this can add up to significant savings.
RRSP contributions are tax-deductible (within the specified limits). Contribution amounts are deducted from an investor’s taxable income for the year, reducing income tax owed.
A group RRSP differs from an individual RRSP in three ways:
- Contributions to group RRSPs can be made through payroll deduction.
- Employers pay the administration expenses.
- Group RRSPs usually have higher guaranteed investment rates and lower investment management fees.
Limits are defined by the Income Tax Act. The limit is 18 per cent of the previous year's earned income minus the pension adjustment for the previous year. The 18 per cent limit is subject to a dollar maximum.
If contributions to an RRSP are less than the limit, the difference is called your contribution room. For example, an investor with an annual RRSP contribution limit of $7,000 contributes only $2,000. The deduction room is $5,000 and can be carried forward for an unlimited time. For more information about RRSP contribution limits, visit www.cra-arc.gc.ca/quickaccess.
A savings plan that provides investment opportunities for amounts unrestricted by government regulations and contribution limits. Investment growth in an NRSP is subject to annual taxation. An NRSP provides flexibility at termination and retirement since no locking-in rules apply.
A group tax-free savings account allows your savings to grow tax-free. You can use the savings in your TFSA to supplement your retirement income, or for other savings needs before retirement.
After-tax dollars you contribute to a TSFA grow tax-free. Withdrawals from a TFSA are also tax-free so the account can be used for retirement savings, retirement income, or for such things as a vacation or a new car. To qualify for a TFSA, an investor must be 18 or older, a resident of Canada and have a valid social insurance number.
Multiple TFSAs are allowed as long as the combined annual contributions for all accounts don’t exceed the maximum annual TFSA contribution amount. Unused contribution room is carried forward indefinitely.
Income earned within a TFSA and withdrawals from it don’t affect eligibility for federal income-tested benefits and credits, such as Old Age Security, Guaranteed Income Supplement or the Canada Child Tax Benefit. Contributions aren't tax deductible and the investment income earned in the account along with any reported losses or gains aren't considered taxable income.
The TFSA provides seniors with a tax-free savings vehicle to meet ongoing savings needs, even after age 71.
To find out TFSA contribution amounts, visit Canada Revenue Agency’s website at www.cra-arc.gc.ca/tfsa.
A RRIF turns the accumulated value of a registered savings plan – typically an RRSP – into retirement income.
You can transfer your RRSP savings to a RRIF on a tax-free basis at any time up to the end of the year in which you turn 71. And you must begin receiving that retirement income no later than the end of the following calendar year.
You won’t pay any taxes at the time you transfer your savings because you’re not immediately withdrawing the savings in cash. The income paid from the RRIF, however, is taxable in the year you receive it.
The income from a RRIF is extremely flexible. You can choose the payment amount, subject to a required minimum that’s based on the value of the RRIF and your age, at the beginning of each year. You can also vary the income from one year to the next to help meet your changing income needs or financial obligations. You might, for example, choose to have your income increase from one year to the next to help combat inflation.
With flexibility, however, comes responsibility. The more income you take out in the short term, the less money you’ll have left in the long term. Whether your savings last a lifetime, or only for a limited number of years, is strictly up to you. Keep in mind that large lump sum withdrawals can also have an impact on your marginal tax rate for the year – which increases the amount of income tax you’ll pay.
A LIF is a tax-sheltered account used to pay out the accumulated value of a locked-in RRSP.
Unlike the money you contribute to your personal RRSP, this money must be used to fund a retirement income.
A LIF is designed to provide an income that will last for a lifetime. But there are some restrictions. In most cases you can’t cash out your LIF. The government sets both a minimum and maximum for the payments you can receive each year from your LIF. Within this range however, you can control your investment options and the amount of your payments.
In Manitoba and Saskatchewan, the prescribed retirement income fund (PRIF) serves as an alternative retirement option for locked-in amounts from an RRSP. It’s designed to share the same flexibility as the LIF, with the added benefits of not having an annual maximum withdrawal limit, or cash out restriction.
Annuities are another option for turning your retirement savings into income. They provide a guaranteed income for a defined period, alleviate ongoing investment risk, and require no investment management by you.
An annuity is a contract you sign with a life insurance company. Under the terms of this contract, you make a lump-sum payment to the insurer – from your defined contribution pension plan, RRSP, RRIF, LIF, LRIF, prescribed RRIF (PRRIF), deferred profit sharing plan (DPSP), or non-registered savings.
In return for this one-time payment, you receive a guaranteed income stream (like a pension) payable for a specified period or as long as you live. Depending on the type of annuity you choose, the payments may continue to your spouse or other beneficiary after your death.
The actual monthly income you receive from your annuity will depend on a number of factors, including:
- The amount of money used to purchase the annuity. The more money you convert, the larger your income will be. For example, $500,000 will buy you a much larger annuity than $100,000.
- Your age. Generally speaking, the older you are when you start to receive your annuity, the higher your annuity income will be. Younger retirees receive less annuity income each month because they’re expected to live longer.
- The type of annuity you purchase. Different annuities offer different features. Some features are quite valuable and, in exchange, result in a lower monthly income.
- The interest rates in effect at the time you annuitize (convert) your savings. Generally speaking, the interest rate used at the time of conversion is fixed for the lifetime of your annuity payments. If interest rates are low, your income will be lower than you might hope. If interest rates are high when you make the purchase, the annuity income will be higher. Once the annuity is purchased, the payments are fixed and the contract usually can’t be cancelled or amended.
Payments from annuities purchased with funds from a registered plan are 100 per cent taxable, while only a portion of those purchased with non-registered funds is taxable.
Great-West Life and key design are trademarks of The Great-West Life Assurance Company (Great-West Life), used under licence by its subsidiaries, London Life Insurance Company (London Life) and The Canada Life Assurance Company (Canada Life). As described, group retirement, savings and income products are issued by London Life and payout annuity products are issued by Canada Life.