RRSPs are a tax deferral program set up by the government to encourage taxpayers to save for retirement. The misconception of RRSPs is that they are a tax saving plan, although tax savings may be achieved by contributing when you are in a high tax bracket (your peak earning years) and redeeming when you are in a low tax bracket (your retirement years), RRSPs are more of a tax deferral and should be looked at in that manner. Not only do they defer the tax on the contribution but also any growth within the RRSP is allowed to grow without tax until it is redeemed, thus allowing us greater compounding of returns on our investment.
- Locked-In Retirement Account (LIRA) or Locked-In Retirement Savings Plan (LRSP)
- Spousal Retirement Savings Plan (SRSP)
How RRSPs Work
RRSP contribution room is based on 18% of your previous years earned income. It is cumulative, meaning if you don’t use it in that year it is carried forward to the next year.
RRSPs have the ability to state beneficiaries. If the beneficiary is your spouse, the RRSP will transfer on your death with no tax implications. If it is transferred to anyone else (except minor children, special rules) it will be treated as if redeemed on your death and the appropriate tax must be paid.
In the year you turn 71 you must convert your RRSP to a RRIF (Registered Retirement Income Fund), you do not have to take it out all at once but you do need to take a minimum out each year and report it in your income.
Knowing when to contribute and when not to contribute is part of maximizing the use of your RRSPs. Also planning on when to redeem and take an income from your RRSP is the key to minimizing taxes and maximizing the use of your money.
Locked-In Retirement Account (LIRA) or Locked-In Retirement Savings Plan (LRSP)
LIRAs/LRSPs are a transfer of a company pension, and are therefore governed under pension legislation.
You cannot withdraw any funds from a LIRA/LRSP until you are 55. At that time you may transfer the LIRA/LRSP to a Life Income Fund (LIF).
There is a minimum and a maximum range for withdrawals determined by the regulations and designed to provide an income for life. The income you will receive will vary from year to year.
There are special cases in which you may be able to get the money out early but they are severe cases.
LIRAs/LRSPs/LIFs, like RSPs, have the ability to name beneficiaries. Also like an RSP, on death of the annuitant the value of the LIRA will be brought into income of the annuitant then paid out to beneficiaries unless the beneficiary is the surviving spouse who can transfer it to their own RSP with no tax consequences.
There are circumstances where unlocking your LIRA may be possible and transferring some or all of it to your RSP may be advisable.
Spousal Retirement Savings Plan (SRSP)
Spousal Retirement Savings Plan is an RSP that you contribute to for your spouse. You are the contributor, (s)he is the Annuitant. In other words, you make a contribution to an SRSP in your spouse’s name, you get the deduction from income but when the spouse redeems the funds the income is recognized in the spouse’s name.
Contributions are subject to your RRSP room, not your spouse’s as you are the one getting the deduction. This can be a powerful income splitting tool for retirement. In the past few years the government has introduced income splitting on retirement income making the SRSP seem obsolete but the government may take the income splitting away so it is still good practice to have retirement assets balanced between spouses.
All rules of RRSP apply to the SRSP. Redemption income will be recognized in your spouse’s hand. However, withdrawals of any contributions in the last 3 years will be taxed against you, the contributor.
Setting up spousal RSPs can be a powerful retirement income splitting tool if you are aware of the rules associated with them. Are they right for your family?