RETIREMENT PLANNING:
When looking at your retirement plan you will need to understand the different kinds of accounts that you may require to achieve your specific retirement goals. Below you will find a brief definition of the various different types of accounts that may be used, although these are no means an exhaustive list:
Non-Registered (OPEN):
An open account is a non-registered investment account. You pay income tax on the income earned throughout the year (ex: dividends, interest, capital gains, etc.). When you sell your investments you could possibly pay a more tax-preferred capital gains/ losses on the sale of the investments.
Tax Free Savings Account (TFSA):
A TFSA is a registered investment account. It allows you to contribute after-tax money and invest it where the growth and income is tax free. There is no up front deduction for the contribution. As well, there is no tax payable on the income while the investments are held inside the TFSA as well as no tax payable when the money is redeemed from the TFSA. Each year there are limits on how much you can contribute to a TFSA and CRA penalties for over-contributions.
TFSA's have the greatest benefit when an individual has a lower income during the working years and will have a higher income in retirement or where you are able to move money to a lower income spouse.
Registered Retirement Savings Plan (RRSP):
An RRSP is a registered investment account. It allows you to contribute with pre-tax money and invest it where the growth and income is tax deferred until it is later withdrawn. When you contribute to an RRSP you receive a tax deduction based upon the amount contributed and your Marginal Tax Rate. Contributions made in the 1st 60 days of the calendar year may be applied to the previous year's tax return or used in the current year's tax return. When you withdraw money from your RRSP, the full amount of the withdrawal is added to your income for tax purposes (treated like employment income).
RRSP's have the greatest benefit when the individual has a higher income during the working years and will have a lower income in retirement or where you are able to contribute to a Spousal RRSP.
Registered Retirement Income Fund (RRIF):
A RRIF is a registered investment account. Essentially a RRIF is a matured RRSP as prior to the end of the year you turn 71, you must roll your RRSP into a RRIF. A RRIF is very similar to an RRSP as the money that remains within the RRIF continues to accumulate on a tax deffered basis; however, the RRIF is a vehicle that provides an income stream where minimum withdrawals are required. The amount of the withdrawal can be anywhere from the minimum withdrawal amount to a full redemption. When you withdraw money from your RRIF, it is added to your income for tax purposes similar to an RRSP.
Individual Pension Plan (IPP):
An IPP is a registered investment account for business owners similar to an RRSP. It is a Defined Benefit Pension Plan. It allows the corporation to make contributions to the owners or employees investment account. The contributions are tax deductible to the corporation. The growth and income grows on a tax deferred basis in the hands of the owner or employee and tax is only payable when the money is later withdrawn from the account similar to an RRSP. One significant benefit for older owners or employees is that contribution limits are higher for an IPP than an RRSP and the IPP allows for past service contributions as well. Click Here: Individual Pension Plan Details
Family Pension Plan (FPP):
A FFP has the same benefits an IPP; however, it allows for more than one family member to be part of the same pension plan as apposed to just one individual. This creates a significant opportunity which enables the transfer of tax deferred assets from one generation to another without triggering tax on the death of the primary beneficiary. This is a significant advantage as the RRSP or RRIF only allows the remaining assets to roll over on a tax deferred basis to a spouse who is the beneficiary.
