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Increased Flexibility for Retirement Planning

The recently announced 2015 federal budget contains several measures with the potential to provide Canadians with greater freedom and control over their finances.

Of particular note are the measures which can give Canadians greater flexibility over their retirement investments. Increasing the annual Tax-Free Savings Account (TFSA) contribution limit and reducing the minimum annual payments for Registered Retirement Income Funds (RRIFs) are beneficial to those who are planning for the long term.

Increase in contribution limit for TFSAs

As of January 1, 2015, the annual TFSA contribution limit is $10,000, up from the previous limit of $5,500. This extra $4,500 in annual contribution room offers a significant tax-efficient opportunity to save for your retirement.

TFSAs offer an excellent opportunity to save in a tax-sheltered manner. Contributions to a TFSA may be invested in a wide selection of investments (the same types of investments eligible for investing in an RRSP or RRIF), and all growth on the investments accumulates tax-free. All withdrawals from your TFSA are received tax-free, and you can re-contribute those amounts to your TFSA the next year (unlike RRSPs, where the contribution room is lost once the funds are withdrawn).

If you are planning for your retirement, saving in a TFSA may provide you with maximum flexibility, as you can take retirement income from your TFSA without impacting your right to receive various social assistance and tax benefits, including Old Age Security, the Guaranteed Income Supplement and the age credit. Also, now that the withdrawal rates for RRIFs have decreased (see page 2), taking retirement income first from your TFSA may allow you to leave investments in your RRIF longer. Withdrawals from your RRIF are 100% taxable, so it is generally beneficial to leave those funds inside your RRIF as long as possible (although in some cases it may make sense to withdraw the funds in your RRIF if you are in a low tax bracket, and invest those sums in your TFSA).

TFSAs are also more flexible than RRSPs as there is no maximum age by which you must start to make minimum withdrawals. You may leave as much money in your TFSA for as long as you want, so this may provide more security in your advanced years once you are required to start withdrawing minimum amounts from your RRIF. Also, if you are over age 71, you may continue to make TFSA contributions, unlike an RRSP, where no further contributions are allowed once you turn 71 (although you may be able to make a contribution to a spousal RRSP if you have a spouse under the age of 71).

The potential impact of the added TFSA contribution room over a 25 year period is shown in the chart above.*

TFSAs also offer increased flexibility for your estate plan, as the amounts may be paid out either to your estate or your beneficiaries on a tax-free basis.

Decrease in minimum withdrawals for RRIFs

Before the budget, a 71-year-old with a RRIF would have to withdraw 7.38% of their RRIF in the first year, which would escalate to 20% by age 94. In the 2015 federal budget, that withdrawal rate has decreased to 5.28% in the first year, and 18.79% by age 94. This gives Canadians the opportunity to preserve more of their wealth over their retirement years. A RRIF owner who withdraws more than the new minimum amount in 2015 will be able to re-contribute to the RRIF an amount up to the reduction in the RRIF minimum withdrawal amount. This re-contribution must be made on or before February 29, 2016 and will be deductible for the 2015 taxation year.

Should you contribute to your TFSA or your RRSP?

If you are planning for your retirement and you are unsure whether to contribute to your TFSA or RRSP (which is the plan you would make contributions to prior to converting it to a RRIF), consider the tax deduction benefits of making an RRSP contribution. To the extent that you have RRSP room (which is 18% of your earned income from the preceding year, to an annual maximum, which is $24,930 for 2015), and you or your spouse are turning 71 or younger in the year, you may contribute to an RRSP, which will provide you with a tax deduction. You may use this tax deduction in the current tax year or carry it forward to a future year if your taxable income is not high enough to provide the maximum tax benefit.

If you are a high income earner, RRSP contributions provide maximum immediate tax savings, as opposed to TFSA contributions, which do not provide immediate tax relief. To the extent the tax deduction resulting from your RRSP contribution results in a tax refund, consider contributing this amount to your TFSA to maximize the benefit of your investment.

The decrease to the RRIF withdrawal factors will permit more capital preservation by allowing assets to be retained in the tax sheltered RRIF investment vehicle.**

All amounts invested inside an RRSP will grow on a tax-deferred basis. Once you and your spouse have turned 71, you will no longer be able to make RRSP contributions, and you will generally be required to convert your RRSP to a RRIF and begin withdrawing from that RRIF. However, the recent budget announcements will allow you to leave more in your RRIF for a longer period of time.

Talk to your Consultant

Although these measures can provide great flexibility and control over your finances, a detailed financial plan can help you make the most of these changes. Review your plan with your Investors Group Consultant to ensure you can benefit from these changes.

*Assumptions:

  • Person is age 50 in 2015
  • Contributes to the TFSA for 25 years
  • No TFSA redemptions made
  • Annual rate of return is 5.0%

**Assumptions:

  • The individual is 71 years of age at the start of 2015 with $500k of RRIF savings, and makes the minimum RRIF withdrawal at the end of each year
  • All figures are expressed in real dollar terms (i.e. adjusted for inflation at 2%)
  • Calculations assume a 5% nominal rate of return on all assets adjusted for inflation

April 2015

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