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Learning Centre -
RRSPs
RRSP Questions & Answers
The
RRSP contribution deadline is around the corner once again, but many of
the issues involved in planning for retirement fall outside the January
to February time-frame. Here are some important questions and answers to
consider.
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What
is an RRSP? |
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A Registered Retired
Savings Plan (RRSP) is an investment vehicle into which investors
can make tax-deferred contributions to be used towards retirement
savings. The funds remain in a tax shelter until retirement
and are then taxed as they are withdrawn, at which point the
contributor is normally in a lower tax bracket. |
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How
much money can I contribute to my RRSP each year? |
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Up to 18 per cent of
your earned income from the previous year, less any pension
adjustment amounts, can be contributed to your RRSP. However,
this amount cannot exceed $14,500 through the 2003 tax year.
The maximum RRSP contribution amount rises to $15,500 for
2004 and to $16,500 for the 2005 taxation year. Any unused
contribution room can be carried forward indefinitely.
In order for any new RRSP contributions to be tax deductible
they must be made during the tax year or within 60 days of
the year following the tax year. E.g. For the 2003 tax year,
all contributions must be made between January 1, 2003 and
March 01, 2004. (March 1, 2004 is actually the 61st day, however
as the 60th day falls on a Sunday an extra day is provided)
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What
is the best means of contributing to an RRSP? |
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Generally speaking the
best method of contributing to an RRSP is to follow "the
sooner the better" approach. You should remember that
time is your ally when saving for retirement so that the earlier
assets can be placed in a plan, the longer they have to compound
tax-free.
A good way to avoid having to make a large annual lump-sum contribution
is to start early in the year and make small monthly payments.
Arrangements can be made through your financial advisor or institution
to have your contributions withdrawn from your bank account
each month to be invested in an RRSP. |
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How
much of my plan can I hold in foreign assets? |
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The
foreign property limit of 30% you were allowed for foreign
property in RRSPs or RRIFs, is canceled effective January
1, 2005. This allows more international diversification opportunities
for retirement investments.
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Crystallizing
my RRSP: What does that mean? |
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To "crystallize"
an RRSP is to increase the book value (purchases plus reinvested
distributions) of your RRSP through the sale and purchase of
the Canadian content investments in the plan and thus increase
the plans foreign content limit . If your Canadian content holdings
have increased substantially in value so that the market value
of the investments is well above the book value, you can sell
them and buy other Canadian content investments within the same
plan. The purchase value of the new investments (the same as
the market value of the old investments) becomes the new book
value and this higher book value will allow you to buy more
foreign content investments. |
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Can
I unlock some of my locked-in RRSP funds? |
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You should be able to
access your locked-in accounts by converting them to a LIF (life
income fund) or LRIF (locked in RRIF) if you are at least age
55. You could then withdraw anywhere between the minimum and
maximum amounts allowed from the LIF or LRIF to help meet your
cash flow needs. You may also be able to withdraw lump sum amounts
from the LIF or LRIF if you meet certain hardship requirements.
The rules that apply to an individual locked-in plan may vary
among provinces and also whether the original pension plan from
which the locked-in funds originated was provincially or federally
regulated. |
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Can
I reduce the withholding tax rate on any RRSP withdrawals? |
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According
to the tax regulations, the withholding tax on RRSP withdrawals
is calculated with respect to each individual withdrawal made,
and not on a cumulative basis. Therefore, if withdrawal requests
of $5,000 are made on five different days to the same institution,
then each withdrawal is subject to the low withdrawal rate
of 10 per cent ( 25 per cent for Quebec residents).
However,
if a single $25,000.00 request is made on one day the institution
must deduct the highest withholding tax rate of 30%(38 per
cent in Quebec).
The
withholding tax is only a partial prepayment of the total
tax liability on the funds withdrawn, so if you are in a high
tax bracket it may be better to have the higher withholding
tax rate apply to reduce the final tax bill when you file
your tax return.
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How
much money can I withdraw from my RRSP to purchase a home under
the Home Buyers' Plan? |
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Each spouse can withdraw
up to $20,000 from an RRSP for which they are the annuitant
assuming each qualifies for the plan. The money borrowed from
an RRSP under the Home Buyers' Plan has to be repaid by way
of contributions to an RRSP over a period of no more than 15
years. The required yearly payment amount is 1/15th of the amount
borrowed and the first repayment period begins in the second
year following the year the RRSP funds were withdrawn for the
home purchase. The repayment period will be shortened due to
death, non-residency or age (over age 69). |
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What
is the maximum amount of money that can be withdrawn from an
RRSP for The Lifelong Learning Plan? |
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Although
$20,000 can be withdrawn from an RRSP over four years to pay
for an education, the most that can be taken out of an RRSP
in one calendar year is $ 10,000. The funds may be used to
finance the full-time program of the participant or their
spouse at a qualifying educational institution.
The
participant has 10 years to repay the money borrowed from
their RRSP, beginning the earlier of the fifth calendar year
after the withdrawal, or the second consecutive year in which
the student cannot claim the education credit for at least
three months of that year. Monies not repaid are taken into
income for that year and taxed.
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Can
I use an RRSP as collateral for a loan? |
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Don't use RRSP assets as
collateral for a loan. When a trusteed RRSP is used as collateral
for a loan, the tax rules require the annuitant to include the
fair market value of the plan as income on his or her personal
return. |
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Are
all RRSPs safe from creditors? |
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No. RRSP assets may not
be "creditor-proof" in the event of bankruptcy. Mutual
fund RRSP's (other than those held in "locked-in"
plans) are not protected from creditors' claims. Consider using
segregated funds as an alternative if you are concerned about
creditor protection since they are an insurance policy and have
a better success rate of avoiding creditor claims. |
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Can
I use my RRSP to invest in a small business? |
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Although there is no
program like the Home Buyers' Plan that would allow a tax free
withdrawal from an RRSP to finance a small business, in certain
restricted circumstances a Self Directed RRSP may hold eligible
small corporation shares or debt as long as the RRSP annuitant
is not a designated shareholder. |
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I
have cash in my RRSP and wish to exchange it for non-registered
funds. |
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This
is called a "swap". A swap is an exchange of properties
between non-registered and registered accounts . This can
be done to rearrange a portfolio or simply to increase liquidity
(through an exchange of non cash assets for cash). With a
swap, there are no mutual fund DSC fees charged as the fund
is not actually redeemed: its status is just changed from
registered to non-registered or vice versa.
Please
note: Transfers of capital property from an open account
to an RRSP are subject to the deemed disposition rules. A
capital gain incurred on the deemed disposition is taxable,
while any capital loss is denied.
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When
starting a spousal RRSP, which partner should be making the
contributions? |
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There is no right answer
here - many different scenarios have to be considered. Generally,
it is best for a higher income earner to contribute on behalf
of the lower income partner. But the future of both people must
also be considered. If one partner has a pension plan through
his/her employer, then it might make sense to start an RRSP
for the other to provide post-retirement income. Speak to your
financial adviser about your specific situation. |
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What
happens to my RRSP if I get divorced? |
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It
is recommended that couples take a close look at the stability
of their marriage before contributing to a spousal RRSP. If
you live in a province that is governed by Family Law, all
assets that are shared and have been accumulated over the
course of the marriage are divided equally. This includes
both personal and spousal RRSPs. If a portion of the RRSP
assets for one spouse have to be transferred to the other
spouse as part of a division of assets, there is a marriage
breakdown document that can be used to effect the transfer.
In this way the transferring spouse does not have a tax liability
and the receiving spouse does not receive a tax receipt.
Please
note: Any personal RRSPs that were acquired by either party
before entering into a marriage are not considered shared
assets and are therefore not included in the division of assets.
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At
what age must I collapse/ convert my RRSP? |
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At the end of the calendar
year in which you turn 69, your RRSP must be converted to either
a RRIF or an annuity, or it must be collapsed. You can however
convert your RRSP prior to age 69. |
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What
options do I have when I collapse/convert my RRSP? |
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When you reach the age
of 69 and the time has come to either collapse or convert
your RRSP, you are faced with a few choices.
- the funds can be
withdrawn and declared as income; or
- the money can be
rolled into a Registered Retirement Income Fund (RRIF);
or
- an annuity can be
purchased with the accumulated funds
Withdrawing the funds
and declaring them as income may not always be the best choice
since you have to pay income tax on the whole amount.
Rolling the funds into
an RRIF or using the money to purchase an annuity are more
popular choices since both of them involve withdrawing the
money in smaller increments over a period of time.
A RRIF is similar to
an RRSP except that you do not make any contributions to it.
There is a minimum amount that you must withdraw each year,
determined by the CCRA (formerly Revenue Canada), but there
is no maximum withdrawal amount.
This means that you are able to withdraw the whole amount
at one time, if you wish. However, any withdrawals must be
declared as income for that year and you will be required
to pay any applicable withholding taxes.
Purchasing
an annuity from an insurance company is another viable option.
With an annuity you provide the insurance company with an
amount of money and in return, they agree to provide you with
a monthly income for the duration of your life. The amount
of the monthly payments depend on your age, the prevailing
interest rates at the time of the annuity purchase and the
length of any guaranteed payment periods in the event of your
earlier demise. Annuities however, do not have the same level
of flexibility as a RRIF since you are generally locked in
to the payment terms that you choose.
Before
collapsing or converting your RRSP, talk to your Fiscal Agents
Advisor to discuss your particular situation.
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What
happens to my RRSP if I die before I reach age 69? |
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If you should die and
there is no surviving spouse (including common law), your RRSP
is considered income and will be taxed as such on your terminal
return. If a surviving spouse exists, the RRSP can be rolled-over
to them tax-free. The survivor then becomes the RRSP holder.
The RRSP can also be transferred tax-free to a financially dependent,
minor child or grandchild to be used to purchase an annuity.
In this case, the annuity length is calculated by subtracting
the child's age at the time of the inheritance from 18. The
number of years remaining would represent the maximum length
of the annuity. |
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What
happens if I leave my RRSP to a charity? |
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Designating a charity as
a beneficiary of an RRSP or RRIF does not absolve a individual
from declaring the fair market value of the plan on their terminal
return for the year of death. Furthermore, since the charitable
contribution is being made directly from the RRSP as opposed
to the estate, the annuitant of the RRSP may not be eligible
to claim the donation credit on the terminal return. |
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Can
RRSP contributions be made on a terminal return? |
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Contributions can not
be made to a deceased person's RRSP. However, if the deceased's
spouse survives, a spousal RRSP contribution can be made by
the legal representative of the estate, as long as the deceased
had sufficient RRSP contribution room before death. This contribution
can then be deducted from income on the terminal return of
the deceased.
Note: No additional
RRSP contribution room is generated from income earned in
the year of death.
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Notice:- Fiscal
Agents Financial Services Group are not engaged in rendering tax,
accounting or legal professional services or advice. The comments
in this Executive Overview are not intended, nor should they be
relied upon, to replace specific professional advice. Before acting
on material contained herein, readers should seek advice that is
appropriate to their personal circumstances from a professional
advisor.
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