RRSP's

A savings plan registered with Canada Revenue Agency (CRA) that allows you to save money for your retirement on a tax-sheltered basis. That means you don't pay tax on the income your investments earn until you withdraw the money from your RRSP.

You may deduct any allowable contributions you make to your RRSP from your annual income. This will reduce the amount of income tax you pay. Any income earned in your RRSP is tax deferred until the funds are withdrawn. As long as your investments stay in your RRSP, any income earned compounds; your income will earn income. This can significantly increase the amount of money you will accumulate for retirement.

RRSP's can be topped up or have their contribution room expanded by use of retiring allowances. These include certain amounts of severance pay and amounts received for wrongful dismissal and unused sick leave credits. Such sums can be transferred tax-free to an RRSP. The amounts that can be transferred are limited as follows: $2,000 for each calendar year or part year of employment before 1996 plus $1,500 for years of employment before 1989 for which employer contributions to pension plans have not vested as locked-in benefits for the employee.

Termination of an RRSP can be done in four ways:

• Funds withdrawn become taxable as ordinary income regardless of the source of the funds. Capital gains and dividends that would have been taxed at a preferentially low rates outside the plan become taxable at full income rates once dispensed from the plan.
• Funds can be used to purchase an annuity. None of the RRSP proceeds are taxed at the time of purchase but only as paid out by the annuity.
• An RRSP can be converted to a RRIF (Registered Retirement Income Fund).
• Finally, a locked in retirement account, often a sum of money held in an account following retirement or apportionment of assets in a divorce, can be converted to a Life Income Fund, LIF, or to a Life Retirement Income Fund, LRIF.

LIFs and LRIFs have minimum and maximum withdrawal limits to age 80. Funds in them remain locked in until a person has reached that age. Any funds remaining in the LIF must be used to buy a life annuity by December 31 of the year in which the person turns 80. A life income retirement fund resembles a LIF except that there is no requirement to buy a life annuity at age 80. LIFs operate in all provinces except PEI.