The next section of the Action Financial Group Orientation Series will deal with Investment Account Types.
An account is not an investment; it is a container that holds one or more investments. Different containers have different features such as size, shape or colour, one hole in the bottom or none, a lid or no lid; different accounts have different features too, such as tax treatment, size limitations, or rules about contributions and withdrawals. Not all accounts are suitable at different life stages or circumstances and it’s always best to seek advice.
Registered Retirement Savings Plan
RRSP = Registered Retirement Savings Plan is an account type primarily used to accumulate retirement savings. Contributions are limited to the contributor’s RRSP contribution room as determined by Canada Revenue Agency (CRA) and based on previous years’ earned income. Amounts contributed to an RRSP can be deducted from the contributor’s taxable income on the tax return, to effectively reduce the amount of current year income that is subject to income tax. Any investment growth or income within the plan accumulates on a tax deferred basis and is only taxed when withdrawn from the plan. All withdrawals (contributed capital, growth and income) from an RRSP are taxable in the year in which they are withdrawn. An RRSP is not intended for regular withdrawals. If regular withdrawals are required, the RRSP could be converted into a RRIF (see the next section about RRIFs). Over-contributions are penalized at the rate of 1% per month on the excess contribution that exceeds the deduction limit by more than $2,000.
Registered Retirement Income Funds
RRIF = Registered Retirement Income Fund is an account type used to provide cash-flow in retirement. It is the “de-cumulation” account that an RRSP transfers into upon retirement, when the owner is ready to start drawing taxable funds out of their retirement savings plan. RRSP funds must be transferred into a RRIF account no later than the end of the year that the owner turns 71. The transfer from RRSP to RRIF is not a taxable event. After the funds are in a RRIF there is a minimum annual amount that must be withdrawn and subject to income tax.
There is no upper limit on how much can be drawn out in a year. The account can be depleted as fast as the owner wants. A retirement cash-flow plan would help determine how much needs to be drawn out each year to supplement other sources of retirement income, in a tax efficient manner. The CRA dictates the source withholding tax on RRIF payments. The required withholding tax may not be the correct amount of tax when all your other sources of taxable income are considered. When you file your annual income tax return, the withholding tax is reported and along with all other taxable income, deductions, tax withheld at source, your tax return is calculated and either a balance owing or a refund is
There will be more Investment Account Types discussed over the next few weeks. We hope you will find this information valuable and will increase your financial confidence. You can always find these articles on our website www.actionfinancialgroup.com.
Karin Rimnyak, CERTIFIED FINANCIAL PLANNER®
David Dryburgh, CERTIFIED FINANCIAL PLANNER®
Ian Barrie, QUALIFIED ASSOCIATE FINANCIAL PLANNER™
This information has been prepared by Karin Rimnyak who is an investment Advisor for iA Private Wealth. Opinions expressed in this email are those of the Investment Advisor only and do not necessarily reflect those of iA Private Wealth. iA private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.