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A Registered Retirement Savings Plan (RRSP), or Retirement Savings Plan (RSP), is a type of Canadian account for holding savings and investment assets. RRSPs have various tax advantages compared to investing outside of tax-preferred accounts. They were introduced in 1957 to promote savings for retirement by employees and self-employed people.
A savings account is a deposit account held at a retail bank that pays interest but cannot be used directly as money in the narrow sense of a medium of exchange. These accounts let customers set aside a portion of their liquid assets while earning a monetary return.
A Guaranteed Investment Certificate is a Canadian investment that offers a guaranteed rate of return over a fixed period of time, most commonly issued by trust companies or banks. Due to its low risk profile, the return is generally less than other investments such as stocks, bonds, or mutual funds. It is similar to a time or term deposit as known in other countries.
In finance, a bond is an instrument of indebtedness of the bond issuer to the holders. The most common types of bonds include municipal bonds and corporate bonds.
Taxation
Contributions to RRSPs are deductible from total income, reducing income tax payable for the year in which the contributions are claimed.[3] No income earned in the account is taxed (including interest, dividends, capital gains, foreign exchange gains, mortality credits, etc.). Most withdrawals are taxed as income when they are withdrawn.[4] This is the same tax treatment provided to Registered Pension Plans established by employers.[5][6]
Other countries provide similar treatment of tax-deferred accounts established by individual investors, i.e., contributions are considered to have been made with savings from before-tax income and tax is paid when amounts are withdrawn: Individual Retirement Accounts in the United States, and Self-invested personal pensions in the United Kingdom.
Disputed net benefits
Net benefits are measured by the difference in outcomes between saving in a taxable account versus saving in an RRSP account. All official sites provide a list of benefits similar to the following:[7]
Contributions are tax deductible.
Savings grow tax-free, but are fully taxed on withdrawal.
The contributor's marginal tax rate when withdrawing funds may be lower than the tax rate the contributor paid when making the original contribution.
There are possibilities for income splitting.
A contributor who would otherwise owe more than $3,000 in taxes at the end of the year ($1,800 in Quebec) can relieve themselves of the obligation to pay their taxes in instalments by reducing the net tax owing below the relevant threshold. By not having to pay instalments, such contributors effectively receive the tax benefit as soon as March 15 (the date the first quarterly instalment is typically due) as opposed to at the end of the tax year.
The inclusion of RRSP withdrawals in taxable income may reduce benefits otherwise received from other programs.
Others dispute that understanding.[12][13][14][15][16] A Canadian economist[17] and two American tax papers on the American equivalent account support this view.[18][19] They provide a model and the math proofs that the tax deduction on contribution is not a benefit, there is no benefit from tax deferrals and that profits are not taxed on withdrawal.
Instead they see the RRSP's benefits as:
A benefit from tax-free growth that is not taxed on withdrawal.
A bonus (or penalty) from a decrease (or increase) in the tax rates between contribution and withdrawal.
A possible loss of other government benefits when withdrawals increase taxable income, and a possible increase in benefits when contributions reduce taxable income.
A loss when there is a delay between contribution and claiming the tax deduction.
RRSP accounts can be set up with either one or two associated individuals:
Individual RRSP: an Individual RRSP is associated with only a single person, called an account holder. With Individual RRSPs, the account holder is also called a contributor, as only they contribute money to their RRSP.
Spousal RRSP: a Spousal RRSP allows a higher earner, called a spousal contributor, to contribute to an RRSP in their spouse's name. In this case, it is the spouse who is the account holder. The spouse can withdraw the funds, subject to tax, after a holding period. A spousal RRSP is a means of splitting income in retirement: By dividing investment properties between both spouses each spouse will receive half the income, and thus the marginal tax rate will be lower than if one spouse earned all of the income.
Group RRSP: in a Group RRSP, an employer arranges for employees to make contributions, as they wish, through a schedule of regular payroll deductions. The employee can decide the size of contribution per year and the employer will deduct an amount accordingly and submit it to the investment manager selected to administer the group account. The contribution is then deposited into the employee’s individual account and invested as specified. The primary benefit with a group plan is that the employee-contributor realizes the tax savings immediately, because the income taxes his or her employer must deduct on every paycheque can be reduced. By contrast, if a taxpayer making a private contribution is not expecting to owe more than $3,000 ($1,800 in Quebec) at the end of the year, then he or she will have to wait until the end of the tax year (or even not until after that in the case of taxpayers expecting a refund) before realizing the benefit.
Pooled RRSP: legislation was introduced during the 41st Canadian Parliament in 2011 to create Pooled Retirement Pension Plans (PRPP). PRPPs would be aimed at employees and employers in small businesses, and at self-employed people.[20]
The 41st Canadian Parliament was in session from June 2, 2011 to August 2, 2015, with the membership of its House of Commons having been determined by the results of the 2011 federal election held on May 2, 2011. Parliament convened on June 2, 2011, with the election of Andrew Scheer as Speaker, followed the next day with the Speech from the Throne. There were two sessions in this Parliament. On August 2, 2015, Prime Minister Stephen Harper asked the Governor General to dissolve Parliament and issue the writ of election, leading to an 11-week election campaign period for the 2015 federal election.
Contributing
Contributing and deducting are two different things. Contributions are usually deducted from taxable income in the same tax year but may be held for future use. Because Canada has a progressive tax system, taxes are reduced at the individual's highest marginal rate. For individuals who always claim the same deduction amount as their yearly contribution, their maximum contribution is the 'Deduction Limit' calculated by the CRA.
The 'Deduction Limit' is a running total calculated for the next year and printed on every Notice of Assessment or Reassessment, provided the taxpayer is aged 71 years or younger. It is reduced by tax deductions claimed and increased by the year's Contribution limit, minus any pension adjustment (PA) and past service pension adjustment (PSPA), plus pension adjustment reversals (PAR).
Contribution limits are calculated at 18% of the prior year's reported earned income (from employment or self-employment), up to a maximum. The maximum has been rising[21] as shown in the table below. Since 2010 it is indexed to the annual increase in the average wage.
Year
Contribution Limit
Year
Contribution Limit
2002
$13,500
2011
$22,450
2003
$14,500
2012
$22,970
2004
$15,500
2013
$23,820
2005
$16,500
2014
$24,270
2006
$18,000
2015
$24,930
2007
$19,000
2016
$25,370
2008
$20,000
2017
$26,010
2009
$21,000
2018
$26,230
2010
$22,000
2019
$26,500
While it is possible to contribute more than the contributor's deduction limit, it is generally not advised as any amount $2,000 over the deduction limit is subject to a significant penalty tax removing all benefits (1% per month on the overage amount).[22]
RRSP contributions within the first 60 days of the tax year (which may or may not be the calendar year) must be reported on the previous year's return, according to the Income Tax Act. Such contributions may also be used as deduction for the previous tax year.
An account holder is able to withdraw dollars or assets from an RRSP at any age. Withholding tax is deducted by the institution managing the account. Amounts withdrawn must be included in the taxable income of that year. The tax withheld reduces the taxes owing at year end. There are two exceptions to this process - the Home Buyer's Plan and the Lifelong Learning Plan.
Before the end of the year the account holder turns 71, the RRSP must either be cashed out or transferred to a Registered Retirement Income Fund (RRIF) or an annuity. Until 2007, account holders were required to make this decision at age 69 rather than 71.
Investments held in a RRIF can continue to grow tax-free indefinitely, though an obligatory minimum RRIF withdrawal amount is cashed out and sent to the account holder each year. At that time individuals hope to be taxed at lower tax rates, but may actually end up paying higher rates than were recovered from contributions.
On death the assets remaining in the account are withdrawn and distributed directly to the named beneficiary. They do not flow through the estate. The account is closed. Like other withdrawals, the value of the assets is included in the taxable income of the account's owner. This large lump sum may result in much of its value being taxed at the top tax bracket. The liability to pay the tax lies with the estate, no matter who received the account's assets.
There are exceptions. When a spouse is the named beneficiary, the account continues, without triggering taxes, in the name of the spouse. There are also provisions for the tax-free transfer of assets to minor children, grandchildren and dependents.[23]
Special withdrawal programs
Home Buyers' Plan
While the original purpose of RRSPs was to help Canadians save for retirement, it is possible to use RRSP funds to help purchase one's first home under what is known as the Home Buyers' Plan (HBP).[24] An RRSP holder can borrow, tax-free, up to $25,000 from their RRSP (and another $25,000 from a spousal RRSP) towards buying their residence.[25] This loan has to be repaid within 15 years after two years of grace. Contrary to popular belief, this plan can be used more than once per lifetime, as long as the borrower did not own a residence in the previous five years, and has fully repaid any previous loans under this plan.
Lifelong Learning Plan
Similarly to the Home Buyers' Plan, the Life-Long Learning Plan (LLP) allows for temporary diversions of tax-free funds from an RRSP. This program allows individuals to borrow from an RRSP to go or return to post-secondary school. The user may withdraw up to $10,000 per year to a maximum of $20,000. The first repayment under the LLP will be due at the earliest of the following two dates.
60 days after the fifth year following the first withdrawal
the second year after the last year the student was enrolled in full-time studies[26]
Both Individual and Spousal RRSPs can be held in one of three account structures. One or more of the account types below may not be an option depending on what type of investment instrument (example stocks, mutual funds, bonds) is being held inside the RRSP.
Client-held accounts
Client-held, or client-name accounts, exist when an account holder uses their RRSP contributions to purchase an investment with a particular investment company. Each time that an individual uses RRSP contribution money to purchase an investment at a different fund company, it results in a separate client-held account being opened. For example, if an individual buys investment #1 with one company and investment #2 with another, the individual would have separate RRSP accounts held with two different companies.
The main benefits of client-name accounts is that they do not generally incur annual fees or "exit fees", the investment is registered with the trustee in the client's name instead of the "dealer's" name and therefore, client-name investments are not subject to bankruptcy issues if the dealer goes bankrupt. Another benefit is that a Dealer Statement generated quarterly by the Mutual Fund Dealer; and Exempt Market Dealer contain all investment activity (buy, sell, switch) through that dealer for ease of tracking investments. The Dealer Statement contains all types of plans for registered investments (RRSP, RRIF, Tax-Free Savings Account, Locked-in Retirement Account, Life Income Fund) and non-registered investments thereby making it easy to track investments in one place.
Generally, client-held accounts are for mutual funds and exempt products only; therefore, if an investor holds stocks and bonds along with mutual funds or exempt products, a Nominee or Intermediary account is most beneficial for ease of tracking all types of investments in one place.
Nominee accounts
Nominee accounts are so named because individuals with this type of account nominate a nominee, usually one of Canada's five major banks or a major investment dealer, to hold a number of different investments in a single account. For example, if an individual buys investment # 1 with one company and investment #2 with another, both investments are held in a single RRSP account with the nominee, a chartered bank.,
The main benefit of a nominee account is the ability to keep track of all RRSP investments within a single account. The main detriment is that nominee accounts often incur annual fees.
A "self-directed" RRSP (SDRSP) is a special kind of nominee account. It is essentially a trading account at a brokerage that has tax-sheltered status. The holder of a self-directed RRSP instructs the brokerage to buy and sell securities on their behalf as with any brokerage account. The reason that it is described as "self-directed" is that the holder of this kind of RRSP directs all the investment decisions themselves, and does not normally have the service of an investment advisor.
Intermediary accounts
Intermediary accounts are essentially identical in function to nominee accounts. The reason investors would have an intermediary account instead of a nominee account has to do with the investment advisor they deal with, as advisors not aligned with a major bank or investment dealer may not have the logistical ability to offer nominee accounts to their clients.
As a result, the advisor will approach an intermediary company which is able to offer the investor identical benefits as those offered by a nominee account. The two main Canadian financial institutions that offer intermediary services are B2B Bank and Canadian Western Trust.
The main benefits and detriments of intermediary accounts are identical as those offered by nominee accounts.
It is possible to have an RRSP roll over to an adult dependent survivor, child or grandchild, as it would to a spouse. This was made possible in 2003 and there are various Income Tax Act (ITA) requirements to allow this to take place. The new registered asset could result in provincial benefits being cut off. In many cases a court application to have someone appointed guardian of the child’s property and person would be necessary to provide a legally authorized party to manage the asset if the child is deemed incompetent to do so. This possibility affects the overall estate plan and often the distribution of the estate.
Acquiring this asset may also affect the adult dependent child’s eligibility for provincial assistance programs. A Henson trust may be useful for enabling the adult dependent child to receive RRSP rollovers and still be eligible for provincial social assistance programs such as Ontario Disability Support Program (ODSP). A Lifetime Benefit Trust (LBT) is a new option that may be valuable for leaving a personal trust in a will for a special needs, financially dependent child, grandchild or spouse. It has the added benefit that RRSP assets dedicated to the LBT could be protected from creditors.
Foreign content
Originally, RRSPs were limited to mostly domestic content, that is, Canadian based investments such as GICs, bonds and shares of Canadian corporations, and mutual funds holding such assets. Non-Canadian content was limited to 10% of the plan's assets, originally measured by market value, and in 1971 changed to 10% of book value.
In 1994, the foreign content limit was raised to 20%. However, by then, mutual fund managers found a way to get around this limitation and offer unitholders exposure to foreign markets without using up any of the foreign content quota. They typically did this by holding all fund assets in Canadian treasury bills or similar cash equivalent assets, and using foreign equity index futures or forward contracts with a similar notional value to obtain equivalent market exposure. Since derivatives are generally considered off-balance-sheet items for accounting purposes, these synthetic foreign funds qualified as 100% Canadian content.
In 2001, the foreign content limit was raised yet again, this time to 30%, but the prevalence of synthetic foreign funds was such as to make the limit a matter of form only.
In 2005, the law was changed to remove foreign content limit altogether.[27][28][29][30][31]
Superannuation in Australia (Australia) – Australia and New Zealand have a reciprocal agreement allowing Australians moving to New Zealand to transfer their Australian superannuation scheme to an approved KiwiSaver funds, and vice versa.[32]
KiwiSaver (New Zealand) – Australia and New Zealand have a reciprocal agreement allowing New Zealanders moving to Australia to transfer their KiwiSaver funds to an approved Australian superannuation scheme, and vice versa.[33]
Vanuatu National Provident Fund (Vanuatu) - The Vanuatu National Provident Fund is a compulsory savings scheme for Employees who receive a salary of Vt3, 000 or more a month, to help them financially at retirement.
Locked-In Retirement Account (LIRA) for Locked-in Retirement Savings Plan (LRSP), Life Income Funds (LIF), Locked-In Retirement Income Funds (LRIF), Prescribed Retirement Income Fund (PRIF)
In the United States, a 401(k) plan is the tax-qualified, defined-contribution pension account defined in subsection 401(k) of the Internal Revenue Code. Under the plan, retirement savings contributions are provided by an employer, deducted from the employee's paycheck before taxation, and limited to a maximum pre-tax annual contribution of $19,000.
A pension is a fund into which a sum of money is added during an employee's employment years and from which payments are drawn to support the person's retirement from work in the form of periodic payments. A pension may be a "defined benefit plan", where a fixed sum is paid regularly to a person, or a "defined contribution plan", under which a fixed sum is invested that then becomes available at retirement age. Pensions should not be confused with severance pay; the former is usually paid in regular installments for life after retirement, while the latter is typically paid as a fixed amount after involuntary termination of employment prior to retirement.
An individual retirement account (IRA) in the United States is a form of "individual retirement plan", provided by many financial institutions, that provides tax advantages for retirement savings. An individual retirement account is a type of "individual retirement arrangement" as described in IRS Publication 590, individual retirement arrangements (IRAs). The term IRA, used to describe both individual retirement accounts and the broader category of individual retirement arrangements, encompasses an individual retirement account; a trust or custodial account set up for the exclusive benefit of taxpayers or their beneficiaries; and an individual retirement annuity, by which the taxpayers purchase an annuity contract or an endowment contract from a life insurance company.
A Roth IRA plan under United States law is generally not taxed upon distribution, provided certain conditions are met. The principal difference between Roth IRAs and most other tax-advantaged retirement plans is that rather than granting a tax reduction for contributions to the retirement plan, qualified withdrawals from the Roth IRA plan are tax-free, and growth in the account is tax-free.
A 529 plan is a tax-advantaged investment vehicle in the U.S. designed to encourage saving for the future higher education expenses of a designated beneficiary. In 2017, K–12 public, private, and religious school tuition were included as qualified expenses for 529 plans along with post-secondary education costs with passage of the Tax Cuts and Jobs Act.
A health savings account (HSA) is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health plan (HDHP). The funds contributed to an account are not subject to federal income tax at the time of deposit. Unlike a flexible spending account (FSA), HSA funds roll over and accumulate year to year if they are not spent. HSAs are owned by the individual, which differentiates them from company-owned Health Reimbursement Arrangements (HRA) that are an alternate tax-deductible source of funds paired with either high-deductible health plans or standard health plans.
Tax advantage refers to the economic bonus which applies to certain accounts or investments that are, by statute, tax-reduced, tax-deferred, or tax-free. Governments establish the tax advantages to encourage private individuals to contribute money when it is considered to be in the public interest.
A retirement plan is a financial arrangement designed to replace employment income upon retirement. These plans may be set up by employers, insurance companies, trade unions, the government, or other institutions. Congress has expressed a desire to encourage responsible retirement planning by granting favorable tax treatment to a wide variety of plans. Federal tax aspects of retirement plans in the United States are based on provisions of the Internal Revenue Code and the plans are regulated by the Department of Labor under the provisions of the Employee Retirement Income Security Act (ERISA).
A traditional IRA is an individual retirement arrangement (IRA), established in the United States by the Employee Retirement Income Security Act of 1974 (ERISA). Normal IRAs also existed before ERISA.
A Registered Retirement Income Fund (RRIF) is a tax-deferred retirement plan under Canadian tax law. Individuals use an RRIF to generate income from the savings accumulated under their Registered Retirement Savings Plan. As with an RRSP, an RRIF account is registered with the Canada Revenue Agency.
Income taxes in Canada constitute the majority of the annual revenues of the Government of Canada, and of the governments of the Provinces of Canada. In the fiscal year ending 31 March 2018, the federal government collected just over three times more revenue from personal income taxes than it did from corporate income taxes.
Superannuation in Australia is taxed by the Australian taxation system at three points: on contributions received by a superannuation fund, on investment income earned by the fund, and on benefits paid by the fund.
An Individual Pension Plan or IPP is a Canadian retirement savings vehicle. An IPP is a one-person maximum defined benefit pension plan which allows the plan member to accrue retirement income on a tax-deferred basis. As such, an IPP must conform to the Canadian Income Tax Act (ITA) and regulations (ITR) as well as the requirements of the Canada Revenue Agency (CRA) with respect to defined benefit pension plans. It is possible for an IPP to be a combination plan offering both defined benefits and defined contribution pensions
Retirement Compensation Arrangements (RCAs) are defined under subsection 248(1) of the Canadian Income Tax Act, which allows 100 per cent tax-deductible corporate dollars to be deposited into an RCA, on behalf of the private business owner and/or key employee. No tax is paid by the owner/employee until benefits are received at retirement. Contributions to an RCA should not exceed what is required to fund the "entitlement" under the Generally Accepted Guidelines for pensions, which are:
The Locked-In Retirement Account(LIRA)/ Locked-in Retirement Savings Plan(LRSP) are Canadian investment accounts designed specifically to hold locked-in pension funds for former Registered Pension Plan (RPP) members, former spouses or common-law partners, or surviving spouses or partners.
Asset location (AL) is a term used in personal finance to refer to how investors distribute their investments across savings vehicles including taxable accounts, tax-exempt accounts, tax-deferred accounts, trust accounts, variable life insurance policies, foundations, and onshore vs. offshore accounts.
The Tax-Free Savings Account is an account available in Canada that provides tax benefits for saving. Investment income, including capital gains and dividends, earned in a TFSA is not taxed in most cases, even when withdrawn. Contributions to a TFSA are not deductible for income tax purposes, unlike contributions to a Registered Retirement Savings Plan (RRSP).
A Personal Retirement Savings Account (PRSA) is a type of savings account introduced to the Irish market in 2003. In an attempt to increase pension coverage, the Pensions Board introduces a retirement savings account that would entice the lower paid and self-employed to start making some pension provision. The intention was for PRSAs to supplement any State Retirement Benefits that would be payable in years to come.
The Saskatchewan Pension Plan (SPP) is a voluntary money purchase defined contribution pension plan created by the Government of Saskatchewan. The SPP was created through The Saskatchewan Pension Plan Act . Oversight of the plan rests with the Saskatchewan Pension Plan Board of Trustees. The plan is also open to both residents of Saskatchewan and other provinces. Saskatchewan is the only province in Canada that operates a pension plan open to the general public. The plan has assets of $450 million and over 33,000 members. The maximum annual individual contribution is $6,200, which will increase annually according to the Year's Maximum Pensionable Earnings.
The National Pension System (NPS) is a voluntary defined contribution pension system in India. National Pension System, like PPF and EPF is an EEE (Exempt-Exempt-Exempt) instrument in India where entire corpus escapes tax at maturity and entire pension withdrawal amount is tax-free.
↑ Don Pittis, 2013 "Essentially, there are two ways to win from an RRSP. The first is a straight bet that you will one day be poorer than you are now. The other is a tax break on your sheltered earnings."
↑ Jack Mintz, "Retirement Income Adequacy""Governments also regulate pensions, and provide tax incentives to encourage people to accumulate wealth for their retirement. By exempting the return on savings from income tax, people who save for retirement pay the same tax over their lifetime as those who do not save. This provides a neutral tax treatment of consumption and saving, which helps improve both fairness and efficiency in the tax system." In other words (editor's comments), profits earned by savings are never tax, and there is no cost/benefit from the different timing of taxes on employment income.
↑ Xanthopoulos, Judy; Schmitt, Mary M. (2008-03-01). "Revenue Estimates and Retirement Policy: The Need to Consider Present-Value Estimates of Changes in Tax Policy". Rochester, NY. SSRN1905721.Cite journal requires |journal= (help)
↑ Directorate, Government of Canada, Canada Revenue Agency, Taxpayer Services and Debt Management Branch, Taxpayer Services. "Death of an RRSP annuitant or a PRPP Member". www.cra-arc.gc.ca. Retrieved 2017-02-28.
↑ Directorate, Government of Canada, Canada Revenue Agency, Taxpayer Services and Debt Management Branch, Taxpayer Services. "What is the Home Buyers' Plan (HBP)?". www.cra-arc.gc.ca. Retrieved 2017-02-28.
↑ Directorate, Government of Canada, Canada Revenue Agency, Taxpayer Services and Debt Management Branch, Taxpayer Services. "Repayments to your RRSP under the LLP". www.cra-arc.gc.ca. Retrieved 2017-02-28.
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