Registered plans
Overview
Registered investment plans are an advantage enjoyed by investors living in Canada. They were developed by the federal government to encourage Canadians to save for their retirement, access a reliable income stream during retirement, and fund the education of their children and grandchildren.
Registered Retirement Savings Plans (RRSPs) let you defer taxes while saving for your retirement; Registered Education Savings Plans (RESPs) let you defer tax while saving for a child’s education and provide government grants that boost your savings; in retirement, a Registered Retirement Income Fund (RRIF) lets your capital continue to grow tax-sheltered until it is withdrawn as income, when you are in a lower tax bracket; and Tax-Free Savings Account (TFSAs) help your savings compound tax-free to a maximum of $5,000 for any purpose.
With the exception of the TFSA, contributions to registered plans are deductible from your taxable income, reducing the amount of income tax you need to pay. Generally, your investments compound tax-free within registered plans, and withdrawals made are taxable — but withdrawals are usually made at a time of life when we are in a lower income bracket, so they are an effective tax minimization tool.
Ask your Macquarie Private Wealth Investment Advisor about the many advantages of including registered investment plans in your portfolio.
Registered Retirement Savings Plans (RRSPs)
At Macquarie Private Wealth, we focus on your future. We believe that effective strategies developed today can make a significant difference to your retirement savings tomorrow. An Investment Advisor can play a key role in looking beyond your current situation to ensure that your retirement savings will allow you to maintain your desired lifestyle throughout your retirement years. Determining the right strategy to maximize your retirement savings can be much easier with the assistance of a qualified Macquarie Private Wealth Investment Advisor.
The importance of an RRSP
Registered Retirement Savings Plans (RRSPs) are one of the key building blocks of your personal wealth management plan. A self-directed RRSP plan gives you complete control over the investments in your RRSP, allowing you to choose from a wide variety of investments including strip bonds, short-term deposits, GICs, equity securities and mutual funds. When supported by superior investment strategies, portfolio returns are able to compound into significant accumulations of wealth over time. Even minor improvements in portfolio returns can result in significant additional funds when you need them most.
Commit to your retirement
Since your RRSP is such an important part of a successful retirement plan, you should be familiar with a few simple ways to get the most out of your RRSP and reach your retirement goals.
Contribute early to start receiving the long-term benefits of compounding returns as soon as possible. The best time to invest is now.
Contribute regularly to create a disciplined savings routine.
Contribute the maximum to ensure the greatest potential for growth.
Market fluctuations over the past few years have made many investors unsure how to manage their RRSP investments effectively. Market ups and downs are part of the natural market cycle. Taking a long-term view, creating a solid plan, having the right asset allocation and maintaining the discipline to stay the course is the best way to benefit from the market’s long-term growth trend.
Tax savings
RRSP contributions reduce income taxes in two ways. First, contributions up to your RRSP contribution limit are treated as a deduction from your annual income. Second, ongoing tax savings occur as investment returns are allowed to compound tax-free inside RRSPs. Income taxes become payable only when funds are withdrawn from an RRSP.
Carry forward unused contribution room
If you contribute less than your maximum allowable RRSP contribution, the unused contribution room will be added to your next year’s maximum contribution limit. This unused contribution room has an indefinite carry-forward period until age 71. Ask your Investment Advisor to review your most recent Notice of Assessment from CRA to determine the exact amount that you can contribute to your RRSP.
Spousal plans may lower future income tax
Spousal RRSPs can be a powerful planning tool, allowing spouses to effectively split their retirement income and potentially reduce their overall income tax burden. Rather than contributing to your own RRSP, you may want to consider a Spousal RRSP contribution. Spousal RRSP contributions are treated like regular RRSP contributions; however, the retirement accumulation and income benefits accrue to your spouse who also controls the account. Provided the contributed funds have been in the spousal RRSP for at least two calendar years, withdrawals are received by and become taxable income of the contributor’s spouse.
Make your contributions easier with an RRSP loan
Even the best plans can run into difficulty. Should you find yourself unable to contribute to an RRSP for cash flow reasons, an RRSP Loan is a simple and effective way to avoid missing the significant tax and retirement benefits that come from making an RRSP contribution.
Speak to your Macquarie Private Wealth Investment Advisor today to discuss our Self-Directed RRSP accounts and the potential benefits of RRSP Loans, and continue building for a comfortable and secure retirement.
Quick facts and features
- The maximum contribution limits for RRSPs are $21,000 for 2009, $22,000 for 2010 and $22,450 for 2011
- RRSP contributions made during the first 60 days of 2010 can be used towards either your 2009 or 2010 RRSP limit
Registered Education Savings Plans (RESPs)
Every year, thousands of students opt to pursue post-secondary education in search of academic enrichment and greater career opportunities. Unfortunately, many families simply are not prepared for the financial burden of higher learning. Establishing a Macquarie Private Wealth Registered Education Savings Plan (RESP) can help. Although RESPs are not the only option available to those saving for education, they are growing in popularity due to their flexibility and tax-effectiveness.
Benefits of RESPs
Tax-sheltered growth. While contributions to RESPs are not tax deductible to the contributor, income earned on RESP investments remains tax-deferred until withdrawn. Withdrawals by the beneficiary are taxed in the beneficiary's hands.
Savings grant eligibility. Contributions made to an RESP are eligible to receive a grant from the federal government. The Canada Education Savings Grant (CESG) provides RESP account holders with a grant of up to 20 percent of the first $2,500 contributed to the plan every year for each beneficiary under the age of 18. Depending on the family's income, your child may be eligible to receive an additional CESG for contributions you have made. Also, for families who qualify for the Canada Learning Bond (CLB), the government will add to a child's RESP by making a first payment of $500. Families who receive the CLB will also get extra payments of $100 a year for up to 15 years, as long as they qualify for the National Child Benefit Supplement (NCBS).
Maximized growth with broad investment options. There are no foreign content restrictions in an RESP, allowing you to build a globally diversified portfolio.
Who should consider a Macquarie Private Wealth RESP?
- Parents/Grandparents of infants to wish to take maximum advantage of the benefits that are offered every year to age 18
- Parents or relatives who have established plans for savings and wish to maximize their tax-effectiveness
- Parents or relatives who have already established RESPs but are restricted to investing in a limited suite of products
- Parents or relatives who wish to establish a regular savings program for funding education
Contributing early to an RESP can help make post-secondary education more affordable. With more time for your money to grow, your contributions can be smaller and will maximize your childrens’ CESGs. Both of these benefits will help you reach this important savings goal.
What you need to know
Registered Education Savings Plans (RESPs) were created by the federal government to encourage Canadians to save for their childrens’ education by offering certain benefits.
Single Plan RESPs allow the contributor to name one beneficiary who does not have to be related to the subscriber by blood or adoption.
Family Plan RESPs are similar to single beneficiary plans, except that contributors can name more than one beneficiary, provided they are all related to the subscriber by blood or adoption. Family Plan RESPs provide the flexibility of sharing RESP assets among the beneficiaries.
Investment Options. All RESPs are not the same. Mutual fund company RESPs typically offer only mutual funds as investment options. Other RESP plans offer only savings accounts or GICs as alternatives. A Macquarie Private Wealth self-directed RESP allows you to invest in any combination of stocks, bonds and mutual funds.
Contributions can be made to an RESP fo 31 years from the date the RESP is opened. RESPs must be collapsed by December 31 of the 35th year following the year the plan was opened. However, if your child takes a break between high school and post-secondary education, you may be forced to collapse the plan before realizing the full benefit from the funds held within the plan. Any funds that remain in the RESP after the 35-year limit will be subject to withdrawal penalties. If there is a significant age difference between your children, you may want to consider separate RESPs to avoid the risk of the family plan having to be wound up before the youngest child has completed his or her education.
In the event of the contributor’s death, the plan can be continued on behalf of the deceased by heirs, executors, administrators or other legal representatives if outlined in their will. However, if their will does not specify a successor, current tax law allows any other person making contributions to the plan to become the new subscriber. As the new subscriber, they may claim a refund of the capital contributed, leaving only the accumulated income and CESG for the child. If your intention is for the capital in the plan to be used by the beneficiary, then you may want to designate the successor in your will.
A subscriber is a person who opens an RESP and may make contributions to that RESP on behalf of an individual named as a beneficiary.
A beneficiary of an RESP is usually a child, but can be any person named by the subscriber of an RESP to receive money for education after high school from the RESP in the form of Educational Assistance Payments (EAPs). Payments to a beneficiary are made according to the specific terms of the RESP.
The primary caregiver is the individual primarily responsible for the care and upbringing of a child. The primary caregiver is usually the child's mother or father but can also be a child care department, agency, institution or organization that cares for a child who is eligible to receive payments under the children's special allowances act.
Quick facts and features
- Total contribution limit: $50,000 lifetime per beneficiary
- Maximum annual CESG of $500 per beneficiary for a total lifetime grant of $7,200
- Basic CESG — Is equal to 20 percent on the first $2,500 in annual contributions made to each beneficiary of an RESP (with some restrictions for 16- and 17-year-olds)
- Additional CESG — Eligible beneficiaries whose family net income is less than $38,832 will receive 20 percent over and above the current 20 percent basic CESG on the first $500. Eligible beneficiaries whose family net income is between $38,832 and $77,664 will receive 10 percent over and above the current 20 percent basic CESG on the first $500.
- Canada Learning Bond (CLB) — Eligible beneficiaries who the dependent on a primary caregiver who is entitled to the National Child Benefit Supplement will receive an initial CLB payment of $500 and subsequent annual installments of $100 for each year of eligibility until the year in which the beneficiary turns 15.
- Alberta Centennial Education Savings Plan (ACES) — Children of Alberta residents (born or adopted) may receive an initial grant of $500. Subsequent grants of $100 are available to Alberta students who have turned eight, 11 and 14 years of age
- All income earned in an RESP accumulates tax-free until it is withdrawn
- You can withdraw principal contributions at any time without paying taxes; however you may be required to repay CESGs
- Withdrawals of RESP earnings are treated as income and will be taxed in the hands of the beneficiary
If you are not a client of Macquarie Private Wealth and would like more RESP information, contact us at mpwcanada@macquarie.com or 1 866 775 7704.
Registered Retirement Income Funds (RRIFs)
At Macquarie Private Wealth, we do everything we can to enhance your financial future.
We believe that understanding registered programs and building effective strategies today can make a significant difference to your retirement lifestyle tomorrow. A Macquarie Private Wealth Investment Advisor can help you look beyond your current circumstances to help you prepare for your future needs, and ease the process of switching your assets from a mature RRSP to a RRIF.
The RRIF advantage — tax-sheltered growth and deferred taxes
The Canada Revenue Agency requires that you convert all your RRSPs to a Registered Retirement Income Fund (RRIF) or another income option by the end of the year in which you turn 71. For most investors, a RRIF is the preferred choice as it provides a regular income stream for your retirement years and allows you to defer taxes.
A RRIF works like an RRSP in reverse: instead of making annual contributions, you withdraw income for your retirement years. The benefits are two-fold:
- Assets within a RRIF continue to grow tax-sheltered until withdrawn as income.
- When you withdraw funds from your RRIF, you may be in a lower tax bracket (and subject to a lower tax rate) than when the funds were contributed.
How RRIF withdrawals work
There is no withdrawal required in the year your RRIF is set up, but you must withdraw a minimum amount each subsequent year. Assets that are withdrawn from a RRIF are taxed as income in the year in which they are received, and should be included in your taxable income when filing your annual return.
Qualifying RRIF:
- Was opened before 1993, and has not accepted any funds after 1992; or
- Was opened at any time, and has not had funds transferred in after 1992 except from another Qualifying RRIF.
Non-Qualifying RRIF:
- Was opened after 1992; or
- Was opened before 1993 and has funds transferred in from a plan opened after 1992.
Calculating minimum withdrawals
| AGE AT JANUARY 1 | TYPE OF RRIF | CALCULATION |
|---|---|---|
| Under 71 | Any RRIF | 90-minus-age formula |
| 71 – 78 | Qualifying | 90-minus-age formula |
| 71 – 78 | Non-qualifying | Percentage formula |
| 79 or over | Any RRIF | Percentage formula |
Minimum payment formulas
1. 90-Minus-Age Formula:
Market value of RRIF as at December 31 ÷ 90 minus the planholder’s age as of December 31
2. Percentage Formula:
% based on age (see chart below) x RRIF value on January 1
| AGE ON JANUARY 1 |
QUALIFYING RRIFs % (for RRIFs opened prior to 1992) |
NON-QUALIFYING RRIFs % (for RRIFs opened after 1992) |
|---|---|---|
| 69 | 4.76% | 4.76% |
| 70 | 5.00% | 5.00% |
| 71 | 5.26% | 7.38% |
| 72 | 5.56% | 7.48% |
| 73 | 5.88% | 7.59% |
| 74 | 6.25% | 7.71% |
| 75 | 6.67% | 7.85% |
| 76 | 7.15% | 7.99% |
| 77 | 7.69% | 8.15% |
| 78 | 8.33% | 8.33% |
| 79 | 8.53% | 8.53% |
| 80 | 8.75% | 8.75% |
| 81 | 8.99% | 8.99% |
| 82 | 9.27% | 9.27% |
| 83 | 9.58% | 9.58% |
| 84 | 9.93% | 9.93% |
| 85 | 10.33% | 10.33% |
| 86 | 10.79% | 10.79% |
| 87 | 11.33% | 11.33% |
| 88 | 11.96% | 11.96% |
| 89 | 12.71% | 12.71% |
| 90 | 13.62% | 13.62% |
| 91 | 14.73% | 14.73% |
| 92 | 16.12% | 16.12% |
| 93 | 17.92% | 17.92% |
| 94+ | 20.00% | 20.00% |
Witholding tax rates on additional withdrawals
You are free to withdraw more assets from your RRIF than the minimum at any time to help with special expenses or emergencies. If you do so, the additional withdrawal will be subject to withholding tax (tax that is withheld by Macquarie Private Wealth and paid to the government on your behalf) as follows:
Withholding tax rates
Residents of all provinces (except Quebec)
| WITHDRAWAL AMOUNT OVER THE MINIMUM PAYMENT | TAX RATE |
|---|---|
| Up to $5,000.00 | 10% |
| $5,000.01 to $15,000.00 | 20% |
| $15,000.01 and over | 30% |
Residents of all Quebec only
|
UP TO $5,000.00 WITHDRAWN OVER THE MINIMUM PAYMENT |
$5,000.01 - $15,000.00 WITHDRAWN OVER THE MINIMUM PAYMENT |
$15,000.01 OR MORE OVER THE MINIMUM PAYMENT |
|---|---|---|
| Federal tax rate: 5% | Federal tax rate: 10% | Federal tax rate: 15% |
| Provincial tax rate: 16% | Provincial tax rate: 16% | Provincial tax rate: 16% |
Your Macquarie Private Wealth Investment Advisor can work with you to determine what your income needs will be at retirement and how best to use your RRIF to support your lifestyle needs.
When to open a RRIF
You have the option to convert your RRSP into a RRIF or other retirement income option before you reach age 71. This is often a preferred strategy for people who plan on retiring early or who wish to use a portion of their RRSP assets before they are eligible for either CPP (Canadian Pension Plan) or OAS (Old Age Security). Investors who convert some of their RRSP to a RRIF at age 65 or older can take advantage of the government’s Pension Income Tax Credit on the first $2,000 withdrawn.
Given the many options available, it’s best to start planning what you are going to do with your RRSP assets well before you reach the mandatory age of 71. Again, your Macquarie Private Wealth Investment Advisor can assist you in making the decision that is right for you.
Get more information
If you are nearing retirement, we encourage you to speak with your Investment Advisor about which RRIF strategies make sense for you. If you are not already a client of Macquarie Private Wealth and would like more information about RRIFs or the world of other opportunities we present to build your personal wealth, contact us today at mpwcanada@macquarie.com or 1 866 775 7704.
Tax-Free Savings Accounts (TFSAs)
Canadians now have a new way to save with a Tax-Free Savings Account — a flexible, registered account that allows Canadians to earn tax-free investment income.
The TFSA was introduced in the 2008 federal budget as an incentive for Canadians to save. It is the first account of its kind in Canada, and the government is calling it the single most important personal savings vehicle since the introduction of the Registered Retirement Savings Plan in 1957.
What is a TFSA?
A TFSA is an account in which contributions are made with after-tax dollars and withdrawals are tax-free. This means that investments can grow in the account and be withdrawn at any time without being taxed.
Who is eligible to contribute to a TFSA?
Canadian residents who are 18 years of age or older.
How does it work?
- You can save up to $5,000 every year in a TFSA. The $5,000 annual contribution limit will be indexed to the Consumer Price Index and rounded to the nearest $500. For example, with a 2% rate of inflation, the first increase to $5,500 would occur in 2012.
- TFSAs can hold the same investments as registered accounts, such as mutual funds, segregated funds, stocks, bonds, and GICs.
- Any amount withdrawn from the account is automatically added back to your contribution room for the following year.
- Unused contribution room can be carried forward indefinitely to future years.
What are the differences between TFSAs and RRSPs?
- An RRSP is primarily for your retirement savings, while a TSFA is for other investments and savings.
- Contributions to an RRSP are tax deductible and reduce your taxable income, while contributions to a TFSA are not deductible.
- Withdrawals from an RRSP are added to your income and taxed at your current rate, while TFSA withdrawals are tax-free.
- You must convert your RRSP to a RRIF by age 71 and withdrawals after that time are mandated according to a schedule based on your age. There is no similar requirement for TFSAs.
- For RRSPs, once a contribution is made, that contribution room is “used up.” With TFSAs, the amount of a withdrawal is automatically added back to the contribution room in the following year.
What are the other benefits of a TFSA?
- Income earned in a TFSA and withdrawals do not affect your eligibility for income tested benefits, such as Old Age Security, Guaranteed Income Supplement and the Canada Child Tax Credit.
- You can provide the funds for your spouse to contribute to his or her account and the assets in your account are transferred to your spouse upon death without tax implications.
- Those who have maximized their RRSP contributions, or those with employer pension plans who may not be allowed to contribute to an RRSP because of a large pension adjustment amount, can supplement their savings on a tax-free basis.
A TFSA versus an unregistered account
Capital gains and other investment income earned in a TFSA are not taxed.
So, if you contributed $200 a month for 20 years to a TFSA instead of a non-registered account, you would enjoy a total tax savings of $11,045.*
*Assumes a $200 monthly contribution for 20 years, a 5.5% rate of return and an average tax rate of 21%. Source: Government of Canada, 2008 Budget.
The TFSA can be a valuable savings tool, with enough flexibility to meet many different needs. Call your Macquarie Private Wealth Investment Advisor to find out how you can incorporate a TFSA into your financial plan.
Additional resources
TFSA FAQs: http://www.cra-arc.gc.ca/gncy/bdgt/2008/txfr-eng.html
TFSA Calculator: http://www.budget.gc.ca/2008/mm/calc_e.html
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