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PERSONAL INVESTMENTS HELPING YOUR CLIENTS REACH THEIR GOALS. Session 1 Making sense of the different types of investment plans. TYPES OF INVESTMENT CONTRACTS. TFSA. Spousal RRSP. RRSP. LIRA. RRIF. Locked -in RRSP. LIF. Non- registered. TYPES OF INVESTMENT CONTRACTS.

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slide1

PERSONAL INVESTMENTS

HELPING YOUR CLIENTS REACH THEIR GOALS

Session 1

Makingsense of the different types of investment plans

slide2

TYPES OF INVESTMENT CONTRACTS

TFSA

Spousal

RRSP

RRSP

LIRA

RRIF

Locked-in

RRSP

LIF

Non-registered

slide3

TYPES OF INVESTMENT CONTRACTS

Accumulation

Withdrawals

Accumulation and withdrawals

RRSP

RRIF

Spousal

RRSP

TFSA

Life Annuity

Non-registered

LIRA

LIF

Locked-in

RRSP

slide4

RRSP and TFSA

Features, similarities and differences

slide5

REGISTERED RETIREMENT SAVINGS PLAN

  • Primarily for retirement.
  • Contributions are tax deductible.
  • Investment income is tax sheltered.
  • Maximum contribution established by the CRA is lesser of:
    • 18% of previous year’s earned income
    • Fixed dollar amount - $23,820 in 2013 ($24,270 in 2014)

Look at your client’s Notice of Assessment from the CRA.

  • Unused contributions are carried-forward.
  • Amounts withdrawn are 100% taxable.
  • Latest date when an RRSP must be closed: Dec. 31st of the year the annuitant turns 71.
slide6

REGISTERED RETIREMENT SAVINGS PLAN

Tax-deductible contributions - example

slide7

REGISTERED RETIREMENT SAVINGS PLAN

Be careful…

  • Because withdrawals are fully taxable, timing of withdrawal is important.*
  • Ideal for retirement savings because withdrawals at retirement replace in part income earned while working.
  • RRSP withdrawals do not increase the contribution limit.

*Withdrawals done through the Home Buyer’s Plan or Lifelong Learning Plan are not taxable immediately.

slide8

TAX FREE SAVINGS ACCOUNT

  • Introduced in 2009, available to individuals who are 18 years or older, with a valid Canadian SIN.
  • Contributions are not tax deductible.
  • Investment income is tax sheltered.
  • Maximum contribution established by the CRA is currently $5,500 per calendar year (since 2013, was $5,000 per year from 2009 to 2012) .
    • Annual limit indexed based on inflation and rounded to nearest $500
  • Unused contributions are carried-forward
  • Withdrawals are not taxable and are added to the following year’s contribution limit.
slide9

REGISTERED RETIREMENT SAVINGS PLAN

Tax-sheltered investment income

slide10

TAX FREE SAVINGS ACCOUNT

Because withdrawals are tax-free, can be used for various financial goals:

  • Major purchase or project
  • Trip
  • Emergency fund
  • Family or charitable legacy
  • Retirement
  • Any other project…
slide12

SAVING FOR RETIREMENT: RRSP OR TFSA

  • If expected tax rate at retirement is lower than current tax rate: RRSP
  • If expected tax rate at retirement is higher than current tax rate: TFSA
  • If expected tax rate at retirement is same as current tax rate: RRSP or TFSA
    • Although, for this last situation, an RRSP may be the better option because it is less tempting to withdraw money from RRSP for reasons other than retirement.
slide13

SPOUSAL RRSP

RRSP

$ $ $

$ $ $

$

$

$

$

$ $ $

$ $ $

  • Contributor
  • Gets tax deduction.
  • Must have RRSP room.
  • Annuitant/Owner
  • Controls the RRSP (investment choice, withdrawals, etc.).
  • Taxed on withdrawals, but beware attribution rule.

Last contribution

Attribution Rule

2012

2013

2014

2015

2016

2017

2018

slide14

SPOUSAL RRSP – INCOME SPLITTING TOOL

  • Splitting retirement income equally between two people in a couple is a tax-effective strategy.
  • Although the government now permits an individual to split income from a RRIF, LIF or life annuity with his spouse or common-law partner, only possible when annuitant is 65 years old.
  • For those wanting to retire before age 65, a spousal RRSP can still help to split retirement income.
slide16

SPOUSAL RRSP

Typical situations where a spousal RRSP can be used:

  • One of the spouse has a pension plan with employer and the other does not, a spousal RRSP could be open for the latter.
  • When the couple is comprised of a high income earner and a low income earner:
    • High income earner has more RRSP contribution room and will benefit from a larger tax deduction.
slide17

RRIF

After accumulation comes withdrawals

slide19

REGISTERED RETIREMENT INCOME FUND

  • Client maintains control of investment strategy , amount and frequency of withdrawals.
  • Except for the calendar year in which the RRIF is set-up, a minimum amount must be withdrawn each year.
    • The minimum withdrawal amount is based on the RRIF value and age of client on January 1st of each year.
  • Withdrawals are fully taxable.
  • Money remaining in RRIF is tax-sheltered.
slide20

RRIF – ANNUAL MINIMUM WITHDRAWAL

Before age 71: [1 / (90 – age at Jan. 1st)] x RRIF market value at Jan. 1st

slide21

Locked-In Plans

Individual contracts for pension money

slide22

LOCKED-IN RETIREMENT ACCOUNT and LOCKED-IN RRSP

  • Individuals with money in a pension plan of a former employer can transfer that money into a LIRA or Locked-in RRSP:
    • LIRA: Pension plan registered with province
    • Locked-in RRSP: Pension plan registered at the federal level
  • Funds remain tax-sheltered and are locked-in; withdrawal limits and constraints different in every province and at the federal level.
  • Age limit: 71 years old.
  • Jurisdiction of LIRA is based on pension plan province of registration, not client’s province of residence.
slide23

LOCKED-IN RETIREMENT ACCOUNT and LOCKED-IN RRSP

A few typical exceptions to the “lock-in” rules

  • Shortened life expectancy
  • Small amount in LIRA after a specific age (i.e. in Ontario, this exception applies if age is 55 or more)
  • Financial hardship

Ontario rules:

http://www.fsco.gov.on.ca/en/pensions/Pages/Default.aspx

Federal rules:

http://www.osfi-bsif.gc.ca/osfi/index_e.aspx?ArticleID=2660

slide24

LIFE INCOME FUND

LIRA

LIF

Locked-in

RRSP

Defined Contribution Pension Plan

slide25

LIFE INCOME FUND

  • Similar to a RRIF
    • Control of investments, amounts and frequency of withdrawals
    • Annual minimum withdrawals
    • Fully taxable withdrawals
    • Money in the LIF remains tax-sheltered.
  • There is an annual maximumwithdrawal amount.
    • The maximum withdrawal varies depending on the jurisdiction of the LIF.
  • LIF’s jurisdiction is the same as the LIRA or pension plan from where the money comes from.
slide26

LIFE INCOME FUND

As with LIRAs, a few typical exceptions to the “lock-in” rules

  • Shortened life expectancy
  • Small amount in LIF after a specific age (i.e. in Ontario, this exception applies if age is 55 or more)
  • Financial hardship

Ontario rules:

http://www.fsco.gov.on.ca/en/pensions/Pages/Default.aspx

Federal rules:

http://www.osfi-bsif.gc.ca/osfi/index_e.aspx?ArticleID=2660

In addition, for a LIF, most jurisdiction offer the possibility of a one-time withdrawal or transfer of 50% of the amount, starting at a certain age and within a specific period.

slide28

NON-REGISTERED PLAN

  • Contributions do not qualify for tax deductions.
  • Investment income is taxed in year it is earned:
    • Interest income = fully taxable
    • Canadian dividends = qualify for a tax credit which reduces the amount of taxes due
    • Capital gains = only half is taxable
  • No taxes on withdrawals except if an unrealized capital gain is triggered.
  • If capital loss is triggered, client can apply it to any other capital gain in the year, or carry it forward.
slide29

NON-REGISTERED PLAN

When should they typically be used?

  • For major purchases, projects or other goals than retirement, maximise TFSA and then use a non-registered plan.
  • For retirement savings, maximising either the RRSP or TFSA, or both is usually more beneficial.
  • If the client is a company or association, a non-registered plan must be used and the other plans are not available.
slide30

LIFE ANNUITY

TFSA

Spousal

RRSP

RRSP

Life Annuity

LIRA

RRIF

Locked-in

RRSP

LIF

Non-registered

slide31

LIFE ANNUITY

  • Guaranteed income for life
  • Income payment ends upon death of the annuitant, except if:
    • There’s a guaranteed period added to the life annuity and death of annuitant occurs before end of guaranteed period, payments continue until end of guaranteed period.
    • A joint last-to-die annuity is purchased, payments continue until the last death.
  • Annuity payments are fully taxable if money comes from a registered plan.
  • Only the interest portion of the annuity payments are taxable if money comes from a non-registered plan or a TFSA.
slide32

LIFE ANNUITY

When can it be used?

  • With clients who don’t like volatility.
  • With clients worried about outliving their money.
  • With clients that don’t have enough financial discipline (i.e. risk of withdrawing too much money at a time).
  • As part of a complete retirement income, to cover ongoing fixed costs. (especially if client doesn’t have pension income).
slide33

Questions

Next session:

Determining investment goals, mainly retirement goals and implementing strategies to reach them.