Retirement savings alphabet soup
February 14, 2013
By Sheryl Smolkin
SPP, RRSP, Group RRSP, TFSA. This alphabet soup of acronyms represents only a few of the most common retirement savings options available to Canadians.
Other important retirement savings vehicles beyond the scope of this blog include employer-sponsored defined benefit pension plans, defined contribution pension plans and hybrid registered pension plan designs.
Where you chose to save your money and how much you save each year is an individual decision based on your disposable income and your longer-term financial goals. Because each type of plan has different contribution levels, tax consequences and withdrawal rules, it often makes sense to contribute to more than one kind of savings vehicle.
For example, you might decide to:
- Contribute to the Saskatchewan Pension Plan to ensure you have a stream of income at retirement.
- Participate in the Group Registered Retirement Savings Plan sponsored by your employer to get the benefit of employer matching of your contributions.
- Save your “emergency” or “rainy day” fund in a TFSA.
To help you understand and prioritize your retirement savings, here are some key features of each of these program. SPP and RRSP contributions for 2012 must be made by March 1, 2013 to be eligible for a tax deduction.
In all cases, you should consult your financial advisor and obtain more detailed information about each type of program before making savings and investment decisions.
SPP is the only pension plan of its kind in Canada. It is a voluntary defined contribution plan open to anyone between the ages of 18 and 71. Employers who wish to make SPP available as an employee benefit can set up a group plan. Often employers with group plans match employee contributions up to a specified amount selected by the company.
SPP Key Features
| Savings objectives: | Retirement savings. |
| Contributions: | Maximum contributions of up to $2,500/year if RRSP contribution room is available. Up to $10,000/year can be transferred in from another RRSP. No minimum payment. Contribution schedule and payment method at the member’s option. |
| Tax treatment: | Contributions are tax deductible. Tax is paid on benefit payments after retirement. |
| Investments: | Active members can invest in a professionally-managed balanced portfolio intended to maximize earnings and minimize risk or a short-term fund geared to capital preservation. Investment returns in the balanced fund have averaged 8% over the last 26 years and annual fees have been around 1%. |
| Withdrawals: | SPP contributions are locked-in within 6 months of joining and earn interest until the member retires. |
| Portability: | Membership in SPP can continue regardless of where the member resides or works throughout his career. |
| Retirement: | SPP members can elect to retire (start receiving benefits) as early as age 55 and no later than the end of the year they reach age 71. Members can elect to receive a pension from the fund, transfer the lump sum in their account to another locked-in account with a financial institution or a combination of both. |
Registered Retirement Savings Plan
Any person currently working in Canada is eligible to open and contribute to an RRSP until the year he/she turns 71 providing the individual has contribution room and files Canadian taxes. An RRSP account can be opened at any financial institution such as a bank, credit union and most investment houses.
RRSP Key Features
| Savings objectives: | Retirement savings. Home purchase, education (see “withdrawals” below) |
| Contributions: | Until the year the taxpayer turns 71, contributions of up to 18% of earned income from the previous year can be made up to $22,970 in 2012 ($23,820 in 2013.) RRSP contribution room can be found on line (A) of the RRSP Deduction Limit Statement, on taxpayer’s latest income tax notice of assessment or notice of reassessment. |
| Tax treatment: | Contributions are tax deductible. Tax is paid on the full amount of withdrawals before or after retirement. |
| Investments: | RRSPs can be self-directed, or administered by a bank or financial institution. Generally, the types of investments permitted in a in a RRSP include:
The earnings record and investment fees charged will vary and investors must do their own due diligence. |
| Withdrawals: | RRSP contributions are not locked in. However, when funds are withdrawn from an RRSP, the contribution room is lost. The Homebuyer’s Plan and Lifelong Learning Plan allow RRSP withdrawals and repayment in specified circumstances. |
| Portability: | Membership in an RRSP can continue regardless of where the member resides or works throughout his career. |
| Retirement: | Funds in an RRSP can be withdrawn at any time and tax is payable on the full lump sum. Funds that are not withdrawn by the end of the member’s 71st year can be used to purchase an annuity or transferred into a registered retirement income fund. There are provincial pension and federal income tax rules about the maximum/minimum amounts that must be withdrawn each year. |
Group RRSPs
Some employers establish Group RRSPs as an employee benefit. Often employers with Group RRSPs match employee contributions up to a specified amount selected by the company. They also may be able to negotiate lower fees for similar investments than fees charged to individuals by retail financial institutions.
Employers may restrict withdrawal of RRSP contributions by active employees except in extenuating circumstances, by withholding employer contributions for some period of time after a withdrawal is made.
An employee who changes jobs will not be able to continue in the group plan but the funds can be transferred to an individual RRSP with no tax consequences. However, the available investment options and the investment fees may not be as attractive as in the Group RRSP.
TFSA stands for Tax-Free Savings Account. Like an RRSP, a TFSA can be set up at a financial institution such as a bank, credit union, trust or insurance company.
TFSA Key Features
| Savings objectives: | Saving for any short or long term objective including retirement. |
| Contributions: | Up to $5,500/year beginning in 2013. Previously, $5000/yr |
| Tax treatment: | Contributions are not tax deductible but investment earnings accumulate tax free. Any funds withdrawn are also tax free. |
| Investments: | Generally, the types of investments that will be permitted in a TFSA are the same as those permitted in a RRSP. This would include:
The earnings record and investment fees charged will vary and investors must do their own due diligence. |
| Withdrawals: | Funds can be withdrawn at any time. Withdrawals will be added to the member’s TFSA contribution room at the beginning of the following year. |
| Portability: | Membership in a TFSA can continue regardless of where the member resides or works throughout his career. |
| Retirement: | Federal income-tested benefits and credits such as: Old Age Security (OAS) benefits, Guaranteed Income Supplement (GIS), or Employment Insurance (EI) benefits will not be reduced as a result of the income earned in a TFSA or amounts withdrawn from a TFSA. |
Have you made your 2012 SPP contribution yet? Are you also contributing to an RRSP or a TFSA? Send us an email to so*********@sa*********.com and tell us about how you are saving for retirement and your name will be entered in a quarterly draw for a gift card.
If you would like to send us other money saving ideas, here are the themes for the next three weeks:
| 21-Feb | RRSP/SPP deadline | How should you invest your retirement savings? |
| 28-Feb | Debt Reduction | How to eliminate debt |
| 7-Mar | Airline points | Which kind of airline points are better? |
Also see:
SPP vs. TFSA
Understanding SPP annuities
The Wealthy Barber explains: TFSA or RRSP?
RRSP vs. TFSA: Tim Cestnick on where to put spare dollars
To TFSA or to RRSP?
TFSA vs. RRSP – Clawbacks & income tax on seniors
TFSA vs. RRSP – Best Retirement Vehicle?
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