Finding the right plan
A Registered Retirement Saving Plan (RRSP) allows you to save for retirement on a tax-deferred basis.
A Registered Retirement Income Fund (RRIF) is a conversion of an RRSP that allows you to withdraw income during your retirement.
A Tax Free Savings Account (TFSA) allows you to save and invest tax-free.
A Registered Education Savings Plan (RESP) allows you to save for post-secondary education on a tax-sheltered basis.
Tax sheltered investment growth
You don’t pay taxes on the growth of your investments held in an RRSP until you redeem or switch your investments out of the plan. This makes a big difference in the growth of your investments over time.
You will be taxed on the income earned on your investments when you withdraw it from your RRSP, but it is likely you will be in a lower tax bracket in your retirement years.
Reduce Yearly Income Tax
Your contributions to an RRSP (up to your contribution limit) are deducted from your previous year’s taxable income.
Contribute on a Regular Basis
Saving through a Pre-Authorized Contribution (PAC) is a simple and effective means to ensure you are investing regularly. It is convenient, worry free and flexible. PACs can be set up in the frequency and amount of your choice, (subject to low investment minimums).
Diversify your Investments
Consulting with a financial professional will help ensure your portfolio is properly diversified and suitable to meet your individual investment goals and objectives. Diversification ensures your portfolio includes the right mix of assets based on your own personal profile including your investment time horizon and risk tolerance.
Retirement like many things in life is evolving and changing in this post-financial crises world. In this report we look at how Canadians are adapting to this change and provide important financial planning lessons that can be applied as investors plan for retirement.
A Registered Retirement Saving Plan (RRSP) allows you to save for retirement on a tax-deferred basis. Contributions you make to your RRSP (up to your contribution limit) are tax-deductible. Income earned in your RRSP is normally not taxed as long as it stays in the RRSP. However, you will generally pay tax on the full amount of withdrawals from your RRSP. Certain special withdrawals can be made for education (Lifelong Learning Plan) and for purchasing a home (Home Buyers’ Plan). These special withdrawals usually do not require the funds to be taxed when withdrawn, however they require you to repay the funds over a specific period of time.
A Registered Retirement Income Fund (RRIF) is a conversion of an RRSP that allows you to withdraw income during your retirement. You must convert your RRSP into a RRIF (or withdraw the RRSP assets or purchase an annuity) before the end of the year in which you turn 71. Like a RRSP, income earned in your RRIF is normally not taxed as long as it stays in the RRIF. However, unlike a RRSP, you cannot contribute new funds to a RRIF. You must withdraw a minimum amount from your RRIF each year, depending on your age. You will generally pay tax on the full amount of withdrawals from your RRIF.
A Registered Education Savings Plan (RESP) allows you to save for post-secondary education on a tax-sheltered basis. You can set up a RESP for an individual or as a family plan. Contributions to an RESP can earn government incentives like the Canada Education Savings Grant. Depending on your income and where you live, you may be eligible for other government incentives to help grow your RESP.
There is no annual maximum RESP contribution, but there is a lifetime contribution limit of $50,000 for each beneficiary. Contributions to an RESP are not tax-deductible, but income earned in an RESP is normally not taxed as long as it stays in the RESP. The student will generally pay tax on the amount of income and government incentives withdrawn from the RESP – these are called “educational assistance payments”. The contributions to the RESP can generally be withdrawn tax-free.
You can open an RESP and start saving for a child’s education as soon as they are born, provided they are eligible. This provides up to 18 years of tax free growth.
Invest appropriate to your time horizon
There are many types of investment products that can be held in an RESP, including equity, balanced and bond mutual funds and GICs as well as cash savings. The allocation of your portfolio may change as the time your child needs the money approaches.
To simplify the investment decision, BMO Mutual Funds offers a suite of Target Education Portfolios. These five portfolios automatically shift from equities to fixed income as their target end date approaches ensuring they maximize growth in the early years and help to reduce volatility as post-secondary education nears.
More information on the Target Education Portfolios
Save through a Pre-Authorized Contribution (PAC)
A PAC is the best way to save to ensure you meet you financial goals. It is a convenient, worry free way to ensure you are saving on consistent basis. PAC’s are flexible in that you can choose the frequency and have low investment minimums. Even investing small amounts regularly adds up over time.
To further help in your planning, the following report on Education Planning looks at some of the costs, choices and opportunities for ensuring your child has a bright future.
How can a Disability Savings Plan help?
RDSPs have three important advantages:
- As a registered savings plan, earnings grow tax-free until money is withdrawn. This means RDSP contributions can grow faster, helping to accumulate more in the plan.
- RDSPs may be eligible for government incentives of up to an annual amount of $3,500 to a lifetime maximum of $70,000 in grants and an annual amount of $1,000 to a lifetime maximum of $20,000 in bonds, which can substantially boost an RDSP’s value.
- Income payments from RDSPs do not affect income-tested federal government programs, including Old Age Security, the Guaranteed Income Supplement and the Canada Pension Plan. In most provinces and territories, you will still qualify for existing provincial social assistance programs if you have an RDSP.
Who can take advantage of an RDSP?
Anyone who is eligible for the Disability Tax Credit may be the beneficiary of an RDSP. To qualify, the beneficiary must:
- Be a Canadian resident.
- Have a valid Social Insurance Number.
- Be under the age of 60.
- Complete a Disability Tax Credit Certificate (Canada Revenue Agency Form T2201) with the assistance of a qualified practitioner and receive notification of approval from the Canada Revenue Agency.
Who can contribute?
Anyone can contribute to an RDSP as long as they have written permission from the account holder. There is no annual limit on contributions and the lifetime maximum is $200,000.
However, contributions must cease when any one of the following is met: by the end of the year in which the beneficiary reaches age 59, or when the beneficiary no longer lives in Canada, or when the beneficiary no longer qualifies for the Disability Tax Credit, or when the beneficiary dies.
Consider making automatic RDSP contributions at regular intervals throughout the year – you will find it easier on your budget and a convenient way to reach your target annual contribution amount. Keep in mind that the sooner your money is invested in an RDSP, the longer it has to grow tax-deferred.
Government grants and bonds
There are two types of government incentives available through RDSPs. The Canada Disability Savings Grant can add an annual amount of $3,500 up to a lifetime maximum of $70,000 to an RDSP. The Canada Disability Savings Bond can add up to an additional $1,000 annually to an RDSP to a lifetime maximum of $20,000. How much you are eligible to receive in grants and bonds will depend on the family income of:
the beneficiary (and spouse, if applicable), beginning in the calendar year the beneficiary reaches age 19.
the beneficiary’s family, up to and including the year in which the beneficiary reaches age 18.
Plan contributions to maximize grants and bonds
Grants and bonds are only available until the end of the calendar year in which the beneficiary reaches age 49, so plan your contributions to maximize these incentives. Don’t worry if you are late in setting up your RDSP or miss making a contribution. Beginning in 2008 and for a maximum of 10 years, unused grants and bonds are carried forward, giving you the opportunity to catch up by contributing more than $3,500 a year. Note that when catching up, the maximum payable in any one year is $10,500 for grants and $11,000 for bonds.
No additional forms need to be filled out. You will receive past grants and bonds as long as you were eligible for the Disability Tax Credit in the years for which you intend to catch up and your tax returns were filed for the two years prior to each year you intend to receive past grants/bonds. You need only contribute the correct amount to receive all of the grants/bonds to which you are entitled.
RDSP investment options
All our BMO Mutual Funds are available to be held inside your RDSP account with the exception of any funds denominated in U.S. Dollars.
For Mutual Funds:
Connect with a Local Representative or ETF Specialist