What exactly is a registered plan or account?
Registered plans or accounts were created by the federal government to encourage people to save. How? This type of financial investment offers tax advantages exclusive to registered plans and accounts. “They’re called registered investments because they’re registered with the government,” states Steve Mc Cready, financial planner at National Bank.
Some registered plans are for individuals, while others are group plans. “For example, there are group RRSPs set up by employers, whose goal is to encourage their workers to save for their retirement. It’s in people’s best interest to take advantage of this because in most cases, the employer will enhance your contributions every year. The employer’s contributions to this kind of RRSP allows you to increase the money you’re saving for your retirement.”
What are the features and benefits of a registered plan?
The main feature is that they allow you to save tax-free. For example, RRSPs – probably the most well-known kind of registered plan – allow you to save money and will help you save on tax at the end of the tax year by reducing your taxable income. “This has the benefit of motivating you to take action and save money for your retirement,” Steve Mc Cready adds.
Please note that these savings products also have limitations and restrictions. “Registered plans and accounts are governed by regulations and laws that everyone must follow. For example, there are annual contribution limits. To get the most out of a registered plan, you have to do your research. That way, you can take advantage of the benefits while being well aware of their limitations.”
What does “tax-free” mean?
“You often hear that RRSPs can help people save on tax. That’s true, but there’s some nuance there. In a given year, you’ll pay less tax if you contribute to an RRSP, but you’ll pay tax on that money when you withdraw it, whether that’s when you retire or when you withdraw it for reasons such as difficult financial circumstances. That’s why I believe that talking about tax deferrals may be more appropriate.”
“That being said, if you deposit $5,000 and the next year, with the revenue (interest and capital gains), you’re at $5,500, you won’t pay tax on the profitfor the current fiscal year. Compared to the same $5,000 investment made in a non-registered account, you need to report the $500 of gain made that year (if it is interest or dividends) on your tax return for that year. The tax deferral applies until you decide to withdraw this amount," the financial planner points out.
Should you always prioritize registered plans?
Does that mean you should always opt for a registered account rather than an unregistered account? “It depends on your projects and goals,” Steve Mc Cready answers. Unregistered plans don’t allow you to save tax-free, but they often provide greater flexibility in terms of deposits and especially with withdrawals.
What are the main registered plans and accounts?
Contrary to popular belief, registered plans aren’t just for saving for retirement. There’s a wide range of saving solutions that provide many options depending on your projects and goals.
What is an RRSP? The registered retirement savings plan (RRSP) allows you to invest up to 18% of your annual income tax-free from the previous year. The total amount cannot exceed a set yearly limit, however. You have the right to carry forward unused contributions for future use (in anticipation of a large cash inflow OR to limit the tax impact of a large bonus paid in a specific year). As you can tell by its name, an RRSP is a plan that allows you to invest money so you can build and grow capital that is sheltered from tax. However, you could also use the money for a down payment for the purchase of a first home, or if you want to go back to school.
The registered retirement income fund (RRIF) is an extension of the RRSP. You will have to convert your RRSP into an RRIF or an annuity when you reach the age of 71, on or before December 31 of that year.. This allows you to keep your money sheltered from tax. With a good RRIF withdrawal strategy, you will increase your chances of making withdrawals without paying too much tax.
What is a TFSA? The tax-free savings account (TFSA), like the RRSP, offers the benefit of saving money tax-free. But they’re different from RRSPs. Unlike the latter, the amount deposited isn’t deducted from your taxable income. However, you can withdraw from your TFSA at any time, and you won’t pay tax on the money you withdraw. Same as RRSPs, TFSAs also have a contribution limit. You can also carry over any unused contribution room. TFSAs can help you save for your retirement or for any other short-term goals, like a vacation or a trip.
The registered education savings plan (RESP) allows you to save tax-free for a child’s post-secondary education. You can open an RESP for a child whether you’re their parent, their legal guardian, a grandparent or a friend. The main benefit is that your contributions are enhanced by grants offered by the federal and provincial government.. These grants are calculated based on your contributions and the annual family or individual salary, depending on the child's family situation.
The registered disability savings plan (RDSP) serves to ensure the long-term financial security of anyone who qualifies for the Canada disability savings grant (CDSG). RDSP contributions are not tax-deductible and can be made until the end of the year in which the beneficiary turns 59. Withdrawals from an RDSP are not taxable as they’re not counted as part of the beneficiary’s income. As with RESPs, a grant from the government of Canada will add to the savings you contribute.
The voluntary retirement savings plan (VRSP), which is called the pooled registered pension plan (PRPP) in the rest of Canada, is a program that must be set up by an employer. It’s governed by the Voluntary Retirement Savings Plans Act and is an alternative to traditional pension plans. VRSPs motivate you to save for your retirement, by saving on taxes, but with more restrictive criteria than on a group RRSP. Some companies also add to your contributions at the end of each year.
The locked-in retirement account (LIRA) is a registered retirement plan into which you can only transfer money from a complementary retirement or pension plan. Unless an extreme situation arises and in accordance with very strict rules, the LIRA does not allow withdrawals. To have access to the amounts invested, the money must be transferred to a life income fund (LIF). It should be noted that each province has its own rules about LIRA. It is therefore very important to consult a professional when using this type of plan. Another point is that there is a federal counterpart to the LIRA, called a locked-in RRSP, which can only accept transfers from federally chartered pension plans.
The Life Income Fund (LIF) is basically the locked-in version of a RRIF and can only receive money from a LIRA (provincial charter) or a locked-in RRSP (federal charter). It will be used to provide income to the holder over a specified period of time. Its operation is regulated by provincial or federal government authorities. In both cases, the owner must make a minimum withdrawal from their LIF in a given fiscal year.
The individual pension plan (IPP) is specifically aimed at business owners and executives who want to save for their retirement. This program must be set up by the company since, as you can guess from its name, it’s intended for a single individual who wishes to save.
How do you choose a registered plan and use it properly?
“There’s no magic formula or typical model that’s a one-size-fits-all. You have to consider your goals (retirement, travelling, renovations, a child’s education, etc.) and meet with an advisor to build a personalized strategy.”
Steve Mc Cready also emphasizes the importance of making good use of the savings solutions you end up choosing. “I always take the time to explain the difference between registered plans and investments to my clients. Registered plans or accounts are like different baskets. First, you have to decide which baskets you want. You could choose to have an RRSP basket, plus a TFSA basket, and a RESP basket, and so on. Then, you’ll have to decide which eggs you want to put in which basket. The eggs represent investments. They can all be the same, or they can be different. You could choose mutual funds, shares, guaranteed investment certificates, etc.”
How do you withdraw from your registered plans?
Finally, once you’ve selected your registered plans and your strategy is set up, you can start thinking about withdrawing your savings when you retire. “People generally tend to neglect this part of the process, but it’s a very important step. You have to follow the rules, like minimum or maximum withdrawal amounts per year. Whether you need to withdraw from an RRSP, RRIF or REEE, the goal is always to pay the least amount of tax possible on the money you withdraw – without depleting your funds, either. Ideally, you would discuss this with your financial planner,” Steve Mc Cready concludes.
An advisor can help you choose the right registered plans for your goals.