In this issue... IDA Wealth Watch SPECIAL RETIREMENT PLANNING EDITION

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1 IDA Wealth Watch SPECIAL RETIREMENT PLANNING EDITION In this issue... Given increased life expectancies, it is not uncomon for individuals to spend 25 or more years in retirement. Surveys repeatedly show that a major concern among Canadian adults is their ability to provide the standard of living they had hoped for during this phase of their lives. An essential step for Canadians in addressing this concern is to put a sound and timely retirement plan into place. In this special edition of IDA Wealth Watch, we familiarize investors with the retirement planning process. We define the retirement planning process, introduce some fundamental retirement planning concepts and discuss a few of the many investor considerations. We hope advisors can use this document as a helpful resource for clients, and that investors find it an informative and useful tool in helping plan for their retirement. Investment Dealers Association of Canada November 2005

2 TABLE OF CONTENTS SECTION I: RETIREMENT PLANNING AND PREPARATION Preparing the Retirement Plan... 3 PREPARING A NET WORTH STATEMENT...4 PREPARING A RETIREMENT CASH FLOW STATEMENT...6 SECTION II: SOURCES OF RETIREMENT INCOME Government Sponsored Plans... 7 THE OLD AGE SECURITY PROGRAM...7 THE CANADA AND QUÉBEC PENSION PLANS Employer Sponsored Plans...10 EMPLOYER PENSION PLANS...10 GROUP REGISTERED RETIREMENT SAVINGS PLANS...11 OTHER CONSIDERATIONS Registered Retirement Savings...11 ABOUT REGISTERED RETIREMENT SAVINGS PLANS (RRSPS)...12 Who Can Contribute?...12 Contribution Limits...12 Contributions In Kind...13 Contribution Deadlines...13 Carry-forwards...13 Claiming RRSP Deductions in a Later Year...13 Over-Contributing to Your RRSP...13 Self-directed RRSPs...13 Withdrawals and Withholding Taxes...13 RRSPs at Death of Plan Holder...14 Spousal RRSPs...14 Locked-in RRSPs...14 The Home Buyer s Plan Other Personal Assets...15 NON-REGISTERED INVESTMENTS...15 PERSONAL POSSESSIONS...15 HOME EQUITY...15 SECTION III: GENERATING INCOME FROM YOUR RRSPS...16 About Registered Retirement Income Funds (RRIFs)...16 About Annuities...17 WRAP UP...18 This document contains only general information and is not intended to provide fi nancial, legal, or tax advice. Any retirement plan should be designed in consultation with a qualifi ed fi nancial professional.

3 SECTION I: RETIREMENT PLANNING AND PREPARATION Preparing the Retirement Plan Section 1 Retirement planning generally looks at answering three fundamental questions: 1) How much have you got today? 2) How much will you need when you retire? 3) How do you build what you have today into what you will need at retirement? Answering these questions will help build the foundation of your retirement plan. 1. How much have you got today? A starting point in establishing your retirement plan is determining what you currently have available to work with. A useful tool is the net worth statement, which, much like a company s balance sheet, lists your assets and liabilities as of a specific date. The difference between these two amounts is known as your net worth. A sample template for calculating your net worth is shown on the next page. Your net worth will continually change, therefore it is important to update your statement at least annually. Your net worth on your retirement date will identify the assets you have available to meet your retirement needs. The goal of a retirement plan is to ensure that your net worth as of your retirement date is sufficient to provide for these needs. 2. How much will you need when you retire? In retirement planning the question we all want answered is How much will I need when I retire? Unfortunately, there is no simple answer. Some experts suggest as a rule of thumb that your retirement income be equal to approximately 70 to 80% of your pre-retirement income in order to maintain your pre-retirement standard of living. However, that number is only a benchmark and the exact amount you will need depends on various factors, such as your planned retirement lifestyle. A useful tool in estimating your retirement needs is to prepare a retirement budget or cash flow statement. This involves projecting your income and expenses during retirement. A sample cash flow statement is shown in Template 2 on page 6. (Note: Social Development Canada provides access to a useful Retirement Income Calculator on its website to help you estimate your retirement income. Go to choose the A-Z Index, and then scroll down to the Canadian Retirement Income Calculator. ) If your retirement expenses exceed your retirement income, then you have an income shortfall. Any shortfall needs to be covered from your accumulated savings or assets as identified in your net worth statement from step 1. Estimating the net worth needed at retirement to cover any income shortfalls may be a challenging process for some, so consider using the expertise of a financial planning professional. 3. How do you build what you have today into what you will need at retirement? Once you have estimates for how much you have today (step 1), and how much you need at retirement (step 2), you need to devise a strategy to build what you have today to into what you need at retirement. This requires putting a savings and investment program into place as far in advance of your planned retirement date as possible. A financial planning professional can help you construct a proper savings and investment strategy to meet your objective while adhering to your various constraints. IDA WEALTH WATCH - SPECIAL EDITION I 3

4 SAMPLE TEMPLATE 1: HOUSEHOLD NET WORTH STATEMENT STEP 1: LIST YOUR ASSETS Assets ASSETS: AS OF NON-REGISTERED ASSETS Cash/Chequing Accounts Savings Accounts Short-term Deposits Cash Value- Life Insurance Canada Savings Bonds Other Bonds Stocks / Trust Units Mutual Funds / ETFs Long-term Deposits / GICs Rental Property Other Total non-registered Investments SELF SPOUSE JOINT TOTAL (A) REGISTERED ASSETS Individual RRSPs/RRIFs Group RRSPs Locked-in Registered Plans Value of Pension Plan(s) Value of Deferred Profit Sharing Plans RESPs Other Total Registered Investments SELF SPOUSE JOINT TOTAL (B) PERSONAL ASSETS Residence Vacation Property Furnishings / Jewellery Art / Collectables Vehicles / Boats Other Total Personal Assets Total Assets SELF SPOUSE JOINT TOTAL (C) (A+B+C) IDA WEALTH WATCH - SPECIAL EDITION I 4

5 SAMPLE TEMPLATE 1: CONTINUED HOUSEHOLD NET WORTH STATEMENT STEP 2: LIST YOUR LIABILITIES Liabilities LIABILITIES: AS OF SELF SPOUSE JOINT TOTAL Mortgage on Home Mortgage on Other Properties Income/Property Tax Owing Consumer/Investment Loans Credit Card debt Other Total Liabilities STEP 3: SUBTRACT YOUR LIABILITIES FROM YOUR ASSETSL- Net Worth NET WORTH POSITION: AS OF Total Assets (From Step 1) SELF SPOUSE JOINT TOTAL Less Total Liabilities (From Step 2) ( ) ( ) ( ) ( ) Net Worth Position IDA WEALTH WATCH - SPECIAL EDITION I 5

6 SAMPLE TEMPLATE 2: RETIREMENT CASH FLOW STATEMENT RETIREMENT CASH FLOW STATEMENT MONTHLY MONTHLY MONTHLY ANNUAL TOTAL SOURCES OF INCOME (AFTER TAX) Government Plans (OAS, GIS, CPP, etc) Employer Sponsored Plans Part-time/Self Employment Income from Rental Property Other NET (AFTER TAX) INCOME SELF SPOUSE JOINT (MONTHLY X 12) EXPENSES House Related Expenses Rent/Mortgage Payments Property Taxes/Condo fees Utilities (phone, heat, light, water, etc) Home Insurance Household Supplies Home Renovations/Maintenance Furniture Other Entertainment Expenses Vacations Dining Out Theatre/Sport Tickets Club Memberships Books and Newspapers Birthday/Holiday Gifts Other Miscellaneous Expenses Food Clothing Grooming Health and Dental Other Automobile Expenses Payments/Lease Insurance/Licenses Parking/Gas Maintenance Other TOTAL EXPENSES CASH FLOW SURPLUS/DEFICIT (Income less Expenses) IDA WEALTH WATCH - SPECIAL EDITION I 6

7 SECTION II: SOURCES OF RETIREMENT INCOME Section 2 At retirement, your employment income ends and you must rely on other sources of income to provide for your needs and objectives. Four sources of retirement income are commonly available: 1. Government sponsored plans 2. Employer sponsored plans 3. Registered retirement savings 4. Other personal assets 1. Government Sponsored Plans Canada s public pension system provides a modest base with which to build your retirement income. The two main programs are the Old Age Security (OAS) Program and the Canada/Québec Pension Plan (CPP/QPP). THE OLD AGE SECURITY PROGRAM The OAS program includes the OAS Pension, the Guaranteed Income Supplement (GIS) and the Allowance. OAS Pension The OAS Pension is a monthly benefit available to Canadian citizens and legal residents aged 65 years and over who have lived in Canada for at least 10 years since turning 18. It is also available, with some restrictions, to individuals no longer living in Canada. The amount of a person s OAS Pension is determined by how long they have lived in Canada, and not by their employment history. All benefits payable under OAS are adjusted quarterly for increases in the cost of living as measured by the Consumer Price Index. The maximum monthly OAS Pension for the period October to December 2005 is $ You must submit an application in order to receive the OAS Pension, and you should apply six months prior to eligibility to ensure timely processing. The income you receive from the OAS Pension is included in your taxable income, and, depending on your income, you may need to repay some of the amount. For 2005, OAS recipients with an income over $60,806 will be required to repay a portion of their OAS, while at an income of $98,850, the entire OAS will be clawed back. The Guaranteed Income Supplement The Guaranteed Income Supplement (GIS) is a monthly supplement for OAS pensioners who have little or no other income. To receive the GIS, you must be receiving an OAS Pension and have a yearly income or, combined yearly income (with your spouse or common-law partner), that does not exceed certain limits. The maximum monthly GIS benefit for the October-December 2005 period is $ for a single pensioner. You must reapply for the GIS every year (most seniors can automatically reapply by filing their tax return by April 30) and the actual amount you receive is adjusted yearly for changes in your financial circumstances and marital status. Unlike the OAS Pension, the GIS is not included in taxable income, but is indexed to the Consumer Price Index. The Allowance The Allowance may be paid to the spouse or common-law partner of an OAS pensioner, or to a widowed spouse (survivor) of a person who was eligible for OAS, or would have been had they survived to age 65. To qualify, you must be between the ages of 60 and 64, and must have lived in Canada for at least 10 years after turning 18. IDA WEALTH WATCH - SPECIAL EDITION I 7

8 Additionally, your annual income as a survivor, or your combined yearly income as a couple, cannot exceed certain limits that are established quarterly. The Allowance stops when you become eligible for an OAS Pension at age 65, or if you leave Canada for more than six months. If you are receiving the Allowance as the spouse or common-law partner of an OAS Pensioner, it will stop if your spouse/partner ceases to be eligible for the OAS or if you separate or divorce. For the survivor Allowance, benefits stop if you remarry or live in a common law relationship for more than 12 months. The maximum monthly benefit under the regular Allowance for October-December 2005 is $851.29, while the survivor allowance is $ Allowance benefits are not considered taxable income but must still be reported on your tax return. OAS benefits and income level cutoffs for the periods October to December 2005 are outlined in this table below. For up-to-date figures and additional details, visit the Social Development Canada website at If you need additional information about applying for an OAS benefit, call the Government of Canada s Income Security Program at 1 (800) OLD AGE SECURITY PROGRAM (OAS) OCTOBER TO DECEMBER 2005 TYPE OF BENEFIT MAX. MONTHLY AVG. MONTHLY MAX. ANNUAL BENEFIT BENEFIT (JULY 05) INCOME Basic Old Age Security Pension $ $ see note* Guaranteed Income Supplement Single $ $ $13,704 Spouse/Common-law partner of a non-pensioner $ $ $33,168 a pensioner $ $ $17,856 an Allowance recipient $ $ $33,168 The Allowance Regular $ $ $25,536 Survivor $ $ $18,744 *Note: OAS pension claw back starts at an income of $60,806. Full claw back at an income of $98,850 or above. Source: Social Development Canada THE CANADA AND QUÉBEC PENSION PLANS The Canada Pension Plan (CPP) and Québec Pension Plan (QPP) collectively provide benefits to most individuals who have worked in Canada. With very few exceptions, every person in Canada over 18 who earns more than the basic exempted amount ($3,500 per year) must contribute to the CPP/QPP. Contributions are only made on your earnings between the basic exempted amount and a maximum level ($41,100 in 2005 and adjusted each January). This is known as your pensionable earnings and the amount you must contribute to CPP/QPP is equal to 9.9% of your pensionable earnings. You and your employer each pay half the contribution (4.95%) to a maximum annual amount of $3, ($1, each). Self-employed individuals must pay both portions. Generally, the more you earn and contribute to the CPP/QPP over the years, the higher your entitled benefits will be. Employee and employer contributions are considered income-tax credits but benefits received under the CPP/QPP are part of your taxable income. CPP/QPP benefits may also affect the amount you receive from income-tested benefits programs such as GIS and private-sector pension benefits. You can find out how much you have contributed to CPP/QPP by reviewing your Statement of Contributions, which also provides an estimate of what your pension would be if you were eligible to receive it immediately. To request a copy of your Statement of Contributions, contact the Canadian Income Security Program at 1 (877) or visit IDA WEALTH WATCH - SPECIAL EDITION I 8

9 The CPP/QPP offer three kinds of benefits to eligible individuals: 1. The retirement pension 2. Disability benefits, 3. Survivor benefits. Retirement Pension The Retirement Pension is a monthly benefit to individuals who are at least 60 years of age and have contributed to either or both CPP or QPP. Pension benefits under the plan(s) are indexed to the average wage growth. For 2005, the maximum monthly benefit for CPP/QPP is $ The average rate, however was only around $450. You can choose to receive your monthly retirement pension starting at age 65, regardless of whether you have retired from the workforce or not. However, you have the flexibility to start receiving the pension earlier (as early as age 60) or deferring it to a later date (any time up to age 70). The pension payments are adjusted by 0.5% for each month before or after your 65th birthday from the time you begin to receive your pension. For example, if you start your pension at age 60, your monthly payment is 30% lower (0.5% x 60mths) than if you wait until age 65. If, on the other hand you wait until age 70 to receive your pension, then your monthly payment is 30% higher. For additional information or to receive an application package, contact the Government of Canada s Income Security Program at 1 (800) or Régie des rentes Québec at 1 (800) Disability Benefits The CPP/QPP disability program provides protection to working Canadians against the loss of earnings due to a disability that prevents them from working. Both the CPP and QPP have eligibility requirements that have to be met in order to qualify for benefits. The CPP/QPP disability pension consists of a fl at-rate component and an earnings-related component. The maximum monthly disability benefit in 2005 is $1, under the CPP and $1, under the QPP. Once again, this income is taxable, and may impact the disability benefits you receive from other programs. Disability pensions commence four months after the disability occurred, and are paid monthly until the beneficiary reaches age 65 or recovers from the disability. At age 65, the disability pension is automatically converted into a retirement pension. Dependent children of disabled pensioners may also qualify for a monthly benefit, provided the children meet certain requirements of the CPP or QPP. In 2005, the monthly benefit for each child is $ under CPP and $62.22 under QPP. Survivor Benefits CPP/QPP survivor benefits are paid to a deceased contributor s estate, surviving spouse, or common-law partner and dependent children. There are three types of benefits, the death benefit, the survivor s pension, and the children s benefit. The death benefit is a lump-sum payment to the estate of a deceased CPP/QPP contributor. The amount of the death benefit depends on how much the contributor paid into the plan. The maximum benefit under both the CPP and QPP is currently $2,500. Following the death of a qualified CPP/QPP contributor, the spouse or common-law partner of the deceased contributor, as defined by CPP or QPP, may be entitled to a survivor s pension. The amount of the pension depends on factors such as how long the contributor paid into the plan and the age of the surviving spouse at time of death. For spouses aged 65 or older, the maximum monthly payment under CPP and QPP in 2005 is $ Following the death of a qualified CPP/QPP contributor, the dependent children of the deceased contributor may also be entitled to a monthly benefit. The children must be under the age of 18, or between the ages of 18 and 25 (up to age 18 for QPP) and attending school full time. In 2005, the monthly benefit for each child was $ under CPP and $62.22 under QPP. IDA WEALTH WATCH - SPECIAL EDITION I 9

10 A summary of the CPP/QPP benefits are found in the table below. Individuals should consult the Government of Canada s Income Security Program at 1 (800) , Régie des rentes Québec at 1 (800) , or their financial advisor to find out about additional planning options such as CPP/QPP credit splitting and pension sharing. CANADA PENSION PLAN (CPP) & QUEBEC PENSION PLAN (QPP) 2005 MAX MONTHLY MAX MONTHLY AVG. MONTHLY NEW BENEFITS NEW BENEFITS BENEFIT TYPE OF BENEFIT CPP QPP (CPP OCT 2004) Retirement Pension (at age 65) $ $ $ Disability Benefit $1, $1, $ Survivors Benefit under age 65 $ varies $ age 65 and over $ $ $ Children of disabled contributor $ $62.22 $ Children of deceased contributor $ $62.22 $ Death Benefit (max lump sum) $2, $2, $2, Combined Benefits survivors & retirement (at 65) $ $ $ survivors & disability $1, n.a. $ Source: Social Development Canada 2. Employer Sponsored Plans A disciplined way to save for retirement may be through a plan offered by your employer. Several types of plans exist: EMPLOYER PENSION PLANS There are two broad types of employer pension plans: Defined Contribution plans, also known as Money Purchase Plans, and Defined Benefit plans. In a Defined Contribution plan, the employer and, in the case of contributory plans, both the employer and employee, pay a specified contribution rate. Often, the employees contribute a percentage of their salary and the company matches a portion of that contribution. Pension benefits at retirement are determined by the accumulated contributions and the investment return earned on those contributions. With Defined Contribution plans therefore, the final pension benefit is usually unknown until retirement. Defined Contribution plans expose employees to some investment risk because if the plan has poor investment returns, then the pension may be smaller than expected. In contrast, a Defined Benefit plan specifies the pension amount the employee will receive upon retirement. The pension is determined by a formula, such as a combination of annual earnings, the length of time of employment, and the plan s benefit rate (up to a maximum amount set under the tax rules). Unlike with a Defined Contribution plan, the employer that offers a Defined Benefit plan assumes the risk of investing all contributions to ensure that there is sufficient growth in the plan to cover all future pension payments. Employer and employee contributions into either type of plan are tax deductible, but contribution limits do apply, as outlined in the table below. REGISTERED PENSION PLAN LIMITS Money Purchase RPPs: annual contribution limit $18,000 $19,000 $20,000 $21,000 $22,000 indexed Defined Benefit RPPs: maximum pension benefit $2,000 $2,111 $2,222 $2,333 $2,444 indexed (per year of service) Source: 2005 Federal Budget IDA WEALTH WATCH - SPECIAL EDITION I 10

11 To find out what, if any, plan your employer offers, ask for a copy of your company s pension booklet. It is also a good idea to periodically review a recent copy of your pension statement. GROUP REGISTERED RETIREMENT SAVINGS PLANS Group Registered Retirement Savings Plans (Group RRSPs) represent another way for employees to save for their retirement. Within a group RRSP, employers arrange for employees to make periodic RRSP contributions, usually through payroll deductions. The employer submits all the contributions to the plan s investment manager and administrator, who then deposit the contributions into individual accounts and invests them accordingly. Group RRSPs, like pension plans, are tax-sheltered, meaning that any investment returns such as dividends, interest, or capital gains accumulated in the plan do not get taxed until you start withdrawing from the plan. Payroll deductions are generally done on a pre-tax basis, so the amount of tax your employer is required to deduct at source is calculated after your contribution to the Group RRSP is deducted, resulting in an immediate tax savings for you. With some Group RRSPs, the employer may also choose to contribute to the plan by matching a portion of employee contributions. Employer contributions may have restrictions placed on them such as when you can transfer them to another plan. With most Group RRSP plans, you are responsible for choosing the investments within your RRSP and for selecting a retirement income option at retirement. Participating in a Group RRSP also allows you to benefit from low minimum contribution amounts, often as low as $50, and dollar cost averaging which smooths out overall investment returns. Request plan brochures and documentation from your employer or plan sponsor to find out the particulars about your plan, such as any locking-in provisions or investment options. OTHER EMPLOYER PLANS Other types of employer or group benefit plans such as Profit Sharing Plans or Employee Share Purchase Plans exist, sometimes as a supplement to other plans such as a group pension plan. Find out from your employer what is offered and consider the costs and benefits to membership before enrolling in any program. OTHER CONSIDERATIONS Do not assume you do not need additional savings for retirement just because you are a member of an employer plan. At retirement, you may be disappointed at the level of benefits you receive from your employer plan. Some questions to consider when evaluating your employer plan are: What will happen to your plan if you decide to retire early, change jobs, or at time of death? What investment options, if any, can you choose from within the plan? How will your employer pension impact your government pension? Does your plan include other retirement benefits such as dental care or life insurance? How much additional savings and income do you need above what is available from your employer plan? Many of the questions you may have can be answered by reading information your employer or plan administrator makes available to you or through contacting them directly. Other questions may involve sitting down with your financial advisor and discussing how to fit your employer plan into your overall retirement strategy. 3. Registered Retirement Savings Relying solely on government or employer sponsored programs for your retirement needs may not allow you to achieve the lifestyle you want in retirement. An additional step to ensure your own financial independence at retirement is to build additional retirement savings. An optimal retirement savings vehicle is the Registered Retirement Savings Plan. IDA WEALTH WATCH - SPECIAL EDITION I 11

12 ABOUT REGISTERED RETIREMENT SAVINGS PLANS (RRSPS) Introduced by the federal government in 1957 as an incentive for Canadians to save for their retirement, RRSPs are federally registered savings plans with preferential tax treatment that provide certain advantages to investors. Firstly, the contributions you make to an RRSP are tax deductible, allowing you to defer taxes on a portion of your earned income. The higher your marginal tax rate, the greater the tax savings will be. The benefit of the tax deductibility of RRSP contributions is illustrated in the example below. Example: Immediate Benefi t of Making an RRSP Contribution Suppose you are an individual with $50, 000 in taxable income and in a 29% combined federal and provincial tax bracket. An RRSP contribution of $4,000 will defer $1,160 in taxes from the current year. The calculations are shown below: With NO RRSP Contribution With a $4000 RRSP Contribution Taxable Income $50,000 $50,000 Combined Federal and $14,500 $13,340 Provincial Taxes (29%) ($50,000 x.29) ($50,000 less $4,000, x.29) Deferred Tax $0 $1,160 ($14,500 - $13,340) A second advantage to RRSPs is that investment returns within an RRSP, such as dividends and interest, are not taxed while they remain in the plan. Over time, this tax-free compounding of investment returns can add considerable growth to your portfolio. Additionally, when you do start to withdraw RRSP funds, presumably at retirement, you will most likely be in a lower tax bracket, meaning your withdrawals will be subject to less tax. Note: Investors should be aware that money withdrawn from registered plans such as RRSPs or RRIFs is included as part of taxable income in the year of withdrawal and may aff ect eligibility for income-tested government benefi ts such as OAS or GIS. Some of the rules and regulations governing RRSPs that investors should be aware of are mentioned below. Who Can Contribute? Most individuals with earned income can contribute to an RRSP. Earned income includes wages from employment or income from a business carried on by the taxpayer, alimony received, royalty income, and rental income, among other sources. It does not include sources such as pension or investment income. Contribution Limits There are no limits to the number of RRSP accounts you can open, but there are limits on the annual taxdeductible contributions you can make. You can contribute as much as 18% of your previous year s earned income, up to a maximum dollar amount of $16,500 in In the 2005 budget, the federal government announced the following schedule of increases to the maximum RRSP dollar contribution limits: REGISTERED RETIREMENT SAVINGS PLAN DOLLAR CONTRIBUTION LIMITS RRSPs: Annual Contribution Limit $16,500 $18,000 $19,000 $20,000 $21,000 $22,000 indexed IDA WEALTH WATCH - SPECIAL EDITION I 12

13 If you are a member of a registered pension plan or deferred profit sharing plan, the amount you can contribute to your RRSP is reduced by the value of the pension credits you have earned. This pension adjustment (PA) is reported to you by your employer on your T4 slip. Canada Revenue Agency (CRA) sends a Notice of Assessment following your annual tax return which indicates your allowable RRSP contribution limit plus any unused contribution room that you have available. To request a duplicate copy of your Notice of Assessment, speak to a service representative on the CRA enquiries line at 1 (800) or use CRA s automated service, T.I.P.S., at 1(800) Self-directed RRSPs Self-directed RRSPs, typically available through full-service and discount brokerages, are a type of plan which allows you to hold a wide variety of securities such as qualified stocks, bonds, mutual funds, GICs, etc., unlike certain plans which restrict the type of investments you can hold, usually to select mutual funds and GICs. Under certain conditions, shares of small business corporations, shares of venture capital corporations, certain option contracts, and qualified mortgages may also be held in Self-directed plans. Self-directed plans offer more flexibility and choice, but most charge an annual administration or trustee fee, sometimes as high as $100 or more. Speak to your financial professional to determine if a Self-directed RRSP is appropriate for you. Contributions In Kind An alternative to making a cash contribution to your RRSP is to contribute qualified non-registered securities that you already own. Investors with a Self-directed RRSP can contribute qualified mutual funds, common shares, bonds, etc., and receive a corresponding tax deduction equal to the fair market value of the security at the time of contribution. Investors contemplating this strategy should be aware that if securities are contributed in kind, the security is deemed to be sold at the time of contribution, meaning that any capital gain on the sale is taxable. By contrast, any capital losses are not recognized for tax purposes. Contribution Deadlines In order to claim an RRSP deduction for the year, you must make an RRSP contribution during the year or within the first 60 days of year end. Investors, provided they have contribution room still available, can contribute to their RRSPs up until December 31st of the year they turn age 69, at which time their RRSPs need to be collapsed. Carry-forwards If you are not able to contribute your maximum allowable amount to your RRSP in a given year, you are allowed to carry-forward the unused portion for use in future years. The amount of unused contribution room that you have accumulated since 1991 is shown on your Notice of Assessment. Despite this carry-forward provision, investors should try to contribute their maximum each year so that contributions have longer exposure to the benefits of tax-free compounding. Claiming RRSP Deductions in a Later Year You also have the option to deduct your current year s RRSP contribution in a later year. You might choose this option if you believe you will be in a higher tax bracket next year and would receive a greater tax saving from the deduction. However, this would mean that you delay receiving the tax refund by one year. Over Contributing ing to Your RRSP If you make a RRSP contribution that exceeds your maximum allowable amount for the year, it is considered an over-contribution. You are allowed a lifetime over-contribution limit of up to $2,000 in your RRSP (if you were at least 18 years of age in the preceding year). Any excess amounts will be subject to a 1% per month penalty. Withdrawals and Withholding Taxes Funds can be withdrawn from your RRSP at any time. However, funds withdrawn will be taxed as regular income in the year of withdrawal. Your plan administrator is also required to withhold a certain level of taxes up-front before giving you the balance of your withdrawal (See table on the next page). You will receive a T4 RRSP receipt from your plan administrator for any funds withdrawn during the year showing the amount you have to include as IDA WEALTH WATCH - SPECIAL EDITION I 13

14 part of your taxable income and the credit for the tax withheld. When you file your annual tax return, your personal income situation will determine whether or not you owe additional taxes or are entitled to a refund. TAX WITHHELD ON RRSP WITHDRAWALS 2005 WITHDRAWAL AMOUNT ALL PROVINCES EXCEPT QUEBEC QUEBEC $5,000 or less 10 % 21 % $5, to $15, % 26 % $15, or more 30 % 31 % RRSPs at Death of Plan Holder In the event of an RRSP plan holder s death, their RRSP assets are distributed to their designated beneficiaries. This designation can be specified in the RRSP plan documents or through the plan holder s will. (Rules differ in Québec, please check with your financial advisor). Under certain circumstances, the proceeds of the RRSP will continue to be tax-sheltered. For example, if the spouse is the beneficiary, they have the option of rolling the RRSP assets into their own RRSP or RRIF, preserving the tax-sheltered status of the inherited funds. Other beneficiary designations involving dependent children or grandchildren who are minors or physically or mentally infirm, may also qualify for a tax-sheltered rollover. In most other situations, the full value of the RRSP at the date of death is taxed as income in the final tax return of the deceased. Because of the many tax and estate law considerations involved, investors should seek professional tax and legal advice when coordinating their will and beneficiary designations. Spousal RRSPs A Spousal RRSP is a plan set up in the name of one spouse (generally in the name of the lower income earning spouse or the spouse whose expected income during retirement is lowest) with the other spouse making the contributions. The higher earning spouse gets the benefit of claiming a tax deduction for the amount contributed to the Spousal plan (which lowers the couples overall current year s tax bill) but any withdrawals, subject to antiavoidance provisions, are taxed in the hands of the registered plan owner (the lower earning, and therefore lower tax-paying spouse). Spousal plan assets are owned and controlled by the registered owner of the plan, the noncontributing spouse. The amount which can be contributed into a Spousal plan is limited by the contributor s personal RRSP contribution limit for the year and by how much has been already put into their personal RRSP. Individuals over age 69, who are no longer permitted to make contributions into their own personal RRSPs, may still direct allowable contributions to a Spousal RRSP up until December 31st of the year the spouse turns 69 years of age. Investors should also be aware that anti-avoidance provisions call for amounts withdrawn from Spousal RRSPs to be taxed back to the contributor if any spousal contributions have been made in the year of the withdrawal or in the two previous calendar years. Certain exceptions do apply, such as in the case of a marriage breakdown. Locked-in RRSPs A Locked-in RRSP (sometimes called locked-in retirement accounts or LIRAs) contains funds transferred from a registered pension plan. Individuals generally cannot contribute or withdraw funds from a locked-in RRSP. The funds have to stay in the Locked-in RRSP and will be used to buy a life annuity which provides a steady lifetime income stream. However, in certain provinces, the locked-in RRSP can be transferred to a locked-in RRIF. Lockedin RRIFs may sometimes be called locked-in retirement income funds (LRIFs) or life income funds (LIFs). IDA WEALTH WATCH - SPECIAL EDITION I 14

15 The Home Buyer s Plan Under the Home Buyer s Plan (HBP), individuals are allowed to withdraw up to $20,000 from their RRSP in order to purchase or build a home. In order to participate in the HBP, you generally can not have owned a principal residence within the past five years. If you have a spouse, and he or she is also eligible to participate in the HBP, you can each withdraw up to $20,000 from your own RRSPs. Funds withdrawn under the HBP are not included in your taxable income, nor are any taxes withheld. However, you are required to repay your RRSP within 15 years, starting two years after the year of withdrawal. You do have the option of repaying the borrowed amount sooner if you desire. The repayments do not receive a tax deduction nor do they affect your annual RRSP contribution limit. If you miss a scheduled repayment, the amount is included as part of your taxable income. For more information, refer to the Canada Revenue Agency brochure on the Home Buyer s Plan at 4. Other Personal Assets A fourth source of retirement income includes other personal assets such as non-registered investments, personal possessions such as cars and cottages, and the equity you have built up in your home. NON-REGISTERED INVESTMENTS Given that restrictions are placed on the amount that can be contributed to RRSPs and employer sponsored plans, you may have to accumulate additional retirement savings outside of a registered plan in order to meet your retirement objectives. Creating a balanced and tax-efficient portfolio that delivers the required level of growth or income is essential and may require the assistance of a financial professional. PERSONAL POSSESSIONS Liquidating personal assets such as cars, artwork, or vacation properties is another potential source of retirement income. The proceeds can be used directly or to purchase income generating investments. HOME EQUITY Home-owners can use their homes as an additional source of retirement income. Several options exist such as: 1. Selling your Home Proceeds from the sale can be used to purchase a lower-priced home, or to provide rent for another home or condo, with the difference added to your retirement savings. 2. Reverse Mortgages A reverse mortgage provides homeowners age 62 and older with access to up to $500,000 in tax-free money from the equity built up in their home. The exact amount you might get varies depending on the appraised value of your home and the ages of you and your spouse. No repayment is required while you or your spouse continues living in your home. The full amount, including compounded interest added to the outstanding balance, becomes due upon the death of the last surviving spouse or when your home is sold. Homeowners do have the option to repay it sooner. There are some set-up costs, and tax and estate considerations that need to be examined. Visit www. chip.ca for additional information or speak to your financial advisor to determine if this strategy is right for you. IDA WEALTH WATCH - SPECIAL EDITION I 15

16 SECTION III: GENERATING INCOME FROM YOUR RRSPS RRSP investors must convert their plans into an eligible retirement option no later than December 31st of the year in which they turn 69 years of age. Investors failing to do so will see their plans automatically collapse, the proceeds added to their income for the year, and that income taxed. Generally, RRSP investors have three retirement options for their plans: withdraw all funds from the RRSP, transfer RRSP funds to a Registered Retirement Income Fund (RRIF), or use the RRSP funds to purchase an annuity. A combination of the three can also be used. If you select the first option, and funds are fully withdrawn from your RRSP, tax will be withheld and the amount withdrawn has to be included in your income for the year and taxed at your marginal rate. The other two options, a RRIF or an annuity, allow you to preserve the tax-sheltered status of your RRSP savings, but generally limit the amount of income you receive on a periodic basis. About Registered Retirement Income Funds (RRIFs) Section 3 One of your RRSP conversion options is transferring RRSP funds to a RRIF. You can transfer your RRSP funds into a RRIF at any time, but no later than December 31st of the year you turn 69. Investments in an RRSP can generally be transferred as they are ( in kind ) into the RRIF and while in the RRIF will continue to benefit from the tax-sheltered growth they had within the RRSP. You are not allowed to make contributions into a RRIF, but rather are required to withdraw a minimum amount each year (starting the year after set-up). This minimum amount is based on the age of the planholder or annuitant (or the age of the annuitant s spouse or common-law partner, if elected) and the fair market value of the RRIF at the beginning of the year. The withdrawal amount is calculated by multiplying the market value of the RRIF at the beginning of the year by a prescribed factor corresponding to the plan holder s age. The following table summarizes the prescribed factors for both Qualifying RRIFs (RRIFs opened before 1993) and General RRIFs (RRIFs opened after). MINIMUM ANNUAL RRIF WITHDRAWALS (Fair market value of RRIF multiplied by prescribed factors below) General Qualifying RRIFs** Age Factor Age Factor 71* Age Factor Age Factor 71* Source: Canada Revenue Agency * To calculate factor for below age 71 use the formula 1/(90-age) ** A Qualifying RRIF is generally a RRIF established prior to 1993 When setting up a RRIF, an annuitant also has the option to base the annual minimum withdrawal based on the age of his or her spouse or common-law partner. If the spouse or common-law partner is younger, this will result in lower annual minimum payments for the annuitant, thereby maximizing the amount that can continue to grow tax deferred in the RRIF. IDA WEALTH WATCH - SPECIAL EDITION I 16

17 All funds withdrawn from a RRIF are fully taxed as income but only amounts withdrawn in excess of the minimum annual amount are subject to withholding taxes. For withdrawals above the minimum, withholding taxes are the same as for RRSP withdrawals: TAX WITHHELD ON RRIF WITHDRAWALS 2005 ALL PROVINCES WITHDRAWAL AMOUNT EXCEPT QUEBEC QUEBEC RRIF minimum 0 % 0% $5,000 or less 10 % 21 % $5, to $15, % 26 $15, or more 30 % 31 % The RRIF rules discussed also apply to Spousal RRIFs (RRIFs originating from a Spousal RRSP). However, there are some attribution rules to watch out for. If, for example, Spousal RRSP contributions have been made in the current or previous two years before the conversion to a RRIF, the attribution rules will apply to amounts in excess of the minimum that are withdrawn from the RRIF. These withdrawals will be taxed in the hands of the contributing spouse or common-law partner. The rules that apply upon the death of a RRIF annuitant are generally similar to those previously discussed for the death of an RRSP holder. Because of the many tax and estate law considerations involved, investors should seek professional tax and legal advice when coordinating their will and RRIF beneficiary designations. About Annuities As a third option, you may choose to use the funds in your RRSP (or RRIF) to purchase an annuity from a life insurance company. In exchange for your lump sum, the insurance company agrees to provide you with a regular stream of income for the rest of your life or for a set period of time. The payment amount from the annuity is largely dependent on the following criteria: Age - generally, the older you are, the larger the payments Gender because women are expected to live longer than men, payments for women will tend to be smaller Amount of capital used to Buy the Annuity - the more capital, the larger the payments Interest rates at the Time you Buy - higher interest means higher payments The payment frequency can be monthly, annually, or any other interval agreed upon at the time of purchase, but the payment amount usually remains fixed. This fixed payment provides some level of security to seniors because it allows them to budget or plan, knowing exactly how much income they will receive from the annuity. With an annuity, you transfer all the investment risk to the insurance company, but there are some drawbacks to consider also. Unlike a RRIF, for example, an annuity generally does not allow you access to additional income if needed. Annuities purchased with registered assets, i.e. RRSPs, RRIFs, Locked-in RRSPs, etc., are referred to as registered annuities. Different types of annuities are available, including the following: Life Annuity - provides income for as long as you live. Some also have a guarantee option which guarantees the number of years that payments will be paid. A common period selected is 15 years. If you die during this time, a death benefit is paid to your beneficiary. IDA WEALTH WATCH - SPECIAL EDITION I 17

18 Joint and Last Survivor Life Annuity - provides income payments for as long as you or your spouse live. Term Certain Annuity - gives a specified number of income payments. If you die before all the specified payments have been made, a death benefit is paid to a beneficiary. Deferred Annuity does not start paying income right away. Suitable for investors who don t need income right away but wish to benefit from a high interest rate environment which means higher payments when they do start receiving income. WRAP UP Though people start planning for their retirement at different stages in their lives, it is important to realize that it is never too early to start. The sooner you start and the more retirement savings you accumulate during your prime working years, the better prepared you will be, come retirement. Those closer to retirement face greater challenges, but can still find value in creating a retirement plan. This report demonstrates the multitude of factors that need to be considered before an effective retirement plan can be constructed. Investors should feel comfort in knowing however, that there are trained professionals available to help them construct a suitable retirement plan to help them achieve their desired retirement lifestyle. This document contains only general information and is not intended to provide fi nancial, legal, or tax advice. Any retirement plan should be designed in consultation with a qualifi ed fi nancial professional. IDA WEALTH WATCH - SPECIAL EDITION I 18

19 CALGARY Suite Fourth Ave. S.W. Calgary, Alberta T2P 0J1 Tel.: (403) Fax: (403) HALIFAX TD Centre, Suite Barrington St. Halifax, Nova Scotia B3J 3K9 Tel.: (902) Fax: (902) MONTRÉAL Bureau Place Ville Marie Montréal, Québec H3B 4R4 Tel.: (514) Fax: (514) TORONTO Suite King St. W. Toronto, Ontario M5H 3T9 Tel.: (416) Fax: (416) VANCOUVER Suite 1325 P.O. Box West Georgia St. Vancouver, BC V6B 4N9 Tel.: (604) Fax: (604) Ce rapport est aussi disponible en français sur demande. The Investment Dealers Association of Canada is the national self-regulatory organization and representative of the securities industry. The Association s mission is to protect investors and enhance the efficiency and competitiveness of the Canadian capital markets.

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