Adèle Manseau | Desjardins Group
RRSP, TFSA and RESP won't win you many points in Scrabble, but they certainly pay off come tax time! Although they're well-known, they aren't always put to best use. And don't forget LIRAs, LIFs and LLPs. Do you know when and how to use them? Just imagine placing a "z" on a triple-point score.
Angela Iermieri,* a financial planner with Desjardins, has outlined 10 products behind these acronyms and how getting to know them could pay off for you.
So, which product should you use when . . .
1- . . . you want to put money aside, tax-free?
TFSA: Tax-free savings account
More than a savings account, a TFSA allows you to put money away tax-free, while respecting your annual contribution limit. All Canadians 18 and over can contribute to a TFSA. Contributions are not tax deductible and withdrawals aren't taxable. These accounts are great for short-, medium- and long-term goals.
You might like: What you need to know about TFSAs
2- . . . you want to maintain your lifestyle during retirement?
RRSP: Registered retirement savings plan
An RRSP allows you to build your retirement savings while enjoying tax savings on your contributions. Annual contributions are based on your income (18% of your previous year's income) and contribution limits are cumulative if you aren't able to set aside the maximum each year. You're also allowed to make a contribution in your spouse's name. In addition, RRSPs give you access to programs such as the Home Buyers Plan (HBP) and the Lifelong Learning Plan (LLP).
You might like: 8 common questions about RRSPs
3- . . . you're thinking about buying your first home?
HBP: Home Buyers Plan
This government program allows you to withdraw up to $25,000 from your RRSP, tax free, to purchase your first home. You'll have 15 years to pay that amount back into your RRSP, in amounts equivalent to 1/15 of the withdrawal per year. If you aren't able to make an annual payment, the amount will be added to your taxable income.
You might like: Buying a home: use an RRSP to maximize your down payment
4- . . . you're turning 71 this year?
RRIF: Registered retirement income fund
You'll have to convert your RRSP to an RRIF no later than the year in which you turn 71. Once you've opened an RRIF, you withdraw a minimum monthly amount, depending on your age. Withdrawals are taxable and are added to your income for the year. To keep your savings growing until you retire, you can invest the funds in products that are often eligible for RRSPs.
5- . . . you want to reduce your children's financial burden during their post-secondary studies?
RESP: Registered education savings plan
An RESP lets you put money aside for your children's post-secondary education while opening the door to government grants. Contributions grow tax-free.
If you don't think you can afford to invest in an RESP, there's also financial assistance for students from low-income families.
6- . . . you're leaving your job and don't want to leave anything behind?
LIRA: Locked-in retirement account
If your employer has a pension plan, you can transfer your balance into an LIRA when you leave your job. There are restrictions on funds placed in an LIRA in terms of when a withdrawal can be made and how much. You decide how to invest the funds to keep them growing. No additional deposits are allowed. To make a withdrawal, you'll have to transfer the funds into a life income fund.
7- . . . you're ready to convert your LIRA?
LIF: Life income fund
An LIF is an extension of your LIRA and a locked-in account. But it's the next step in turning your funds into retirement income that you can withdraw. You'll be given an annual minimum and maximum limit for this fund based on your age and the amount held.
You might like: When to convert your LIRA?
8- . . . you want to go back to school?
LLP: Lifelong Learning Plan
The LLP is another government program tied in with RRSPs. It allows you to finance your studies by withdrawing up to $20,000 from your RRSP, tax-free. You'll have up to 10 years to put the money back into your RRSP, by making payments in 1/10 of the withdrawal amount per year. If you aren't able to make an annual payment, the amount will be added to your taxable income.
9- . . . you want to ensure the long-term financial security of a person with disabilities
RDSP: Registered disability savings plan
The government offers generous subsidies and depending on your family income, you may also be eligible for a Canada Disability Savings Bond without having to make a contribution.
10- . . . you're a business owner or a corporate executive
IPP: Individual pension plan
An IPP is a defined benefit plan that can be set up for business owners or corporate executives. Contributions are higher than those authorized for an RRSP and can be shared between the participant and the company.
* Financial Planner and Mutual Funds Representative for Desjardins Financial Services Firm Inc.