What is an RRSP? 

A RRSP is a tax-deferred savings vehicle registered for tax purposes with Canada Revenue Agency.  Individuals accrue RRSP contribution room based on their previous years income. For 2009 the limit was 18% of earned income to a maximum of $21,000.00.  For 2010 the maximum amount is $22,000.00. Contributors who are members of a defined beneft or money purchase pension plan will have their contribution room reduced based on their Pension Adjustment. Contributions to a RRSP are fully deductible from income for tax purposes.

Types of Pension Plans

For many retirees, a company pension plan will represent a substantial part of their retirement income. For this reason it’s important to understand more about these plans.

Defined Contribution

With this type of pension you contribute a percentage of your income (or a fixed amount) to the plan. The employer contributes an additional amount, usually a percentage of your contributions. At retirement you will have accumulated a sum of money based on the value of the money contributed plus the plan’s tax-sheltered investment earnings. This can then be used to provide income by way of converting to an annuity, Locked in Retirement Fund (LRIF), or Locked in Income Fund (LIF.)

Defined Benefit

With this plan a future pension is promised based on a formula which will include a percentage (usually 1-2%) of your final average earnings times your years of membership in the plan. You may or may not contribute to the plan, however the company must be sure the expected future pension is fully funded.

What is a RRIF?

A Registered Retirement Income Fund is established with funds that are rolled over on a tax-deferred basis from an RRSP. Converting your RRSP simply means converting your accumulated RSP investments into a retirement income account. An important factor to keep in mind is that RRSP’s must be converted into RRIF’s before December 31 of the year in which you turn 71. If you miss the legislated deadline, all accumulated funds in your RRSP will be included in your taxable income in the year after the year you reach age 71. Like an RRSP, the returns on investments held within a RRIF continue to accumulate on a tax-deferred basis. However, RRIF’s are subject to minimum withdrawal rules and must be included in your income for the year, so they are subject to income tax.

The amount is calculated as a percentage of RRIF investments in the account at the beginning of the year and is based on the age of the taxpayer on January 1st or the age of the spouse. Basing the calculations on the younger spouse’s age results in lower minimum payments each year. This strategy maximizes the amount that can grow tax deferred in the RRIF. The decision to use a spouse’s age must be made before the first RRIF withdrawal.