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Session 1 Making sense of the different types of investment plans

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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Session 1 Making sense of the different types of investment plans

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  1. PERSONAL INVESTMENTS HELPING YOUR CLIENTS REACH THEIR GOALS Session 1 Makingsense of the different types of investment plans

  2. TYPES OF INVESTMENT CONTRACTS TFSA Spousal RRSP RRSP LIRA RRIF Locked-in RRSP LIF Non-registered

  3. TYPES OF INVESTMENT CONTRACTS Accumulation Withdrawals Accumulation and withdrawals RRSP RRIF Spousal RRSP TFSA Life Annuity Non-registered LIRA LIF Locked-in RRSP

  4. RRSP and TFSA Features, similarities and differences

  5. 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 • Amounts withdrawn are 100% taxable.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.

  6. REGISTERED RETIREMENT SAVINGS PLAN Tax-deductible contributions - example

  7. 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.

  8. 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.

  9. REGISTERED RETIREMENT SAVINGS PLAN Tax-sheltered investment income

  10. 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…

  11. RRSP and TFSA - Comparison

  12. 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.

  13. 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

  14. 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.

  15. ADVANTAGES OF INCOME SPLITTING

  16. 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.

  17. RRIF After accumulation comes withdrawals

  18. REGISTERED RETIREMENT INCOME FUND RRSP RRIF Spousal RRSP

  19. 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.

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

  21. Locked-In Plans Individual contracts for pension money

  22. 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.

  23. 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

  24. LIFE INCOME FUND LIRA LIF Locked-in RRSP Defined Contribution Pension Plan

  25. 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.

  26. 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.

  27. And finally…

  28. 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.

  29. 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.

  30. LIFE ANNUITY TFSA Spousal RRSP RRSP Life Annuity LIRA RRIF Locked-in RRSP LIF Non-registered

  31. 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.

  32. 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).

  33. Questions Next session: Determining investment goals, mainly retirement goals and implementing strategies to reach them.

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