Time to take a look at changes to RRSP, RRIF rules

Hey there, time traveller!
This article was published 29/01/2010 (5758 days ago), so information in it may no longer be current.

There have been a lot of evolutionary changes to RRSP and RRIF rules over the last few years, regarding ages, limits and protection against creditors. While most individual items were not earth shaking, they add up to a lot of change.

As we start a new year for financial planning, and the last few weeks before the March 1 deadline for RRSP contributions deductible on your 2009 returns, it’s a good time to review all of the basic rules.

Creditor protection

Federal legislation came into effect in 2008 that made RRSP and RRIF assets immune from creditors, except for contributions made within 12 months prior to a bankruptcy and for regular payments from a RRIF.

Many provinces — including Manitoba – have enacted similar legislation. Generally, the only creditors who still have full ability to make a claim are ex-spouses and children, to enforce support and maintenance orders.

RRIF rules and age limits

An RRSP must be converted to a RRIF or to an annuity by the end of the year in which the “annuitant” (the owner) turns 71. There is a required minimum withdrawal each year, except in the first year, when the annuitant can request no withdrawal. This request must be made when setting up the plan.

The minimum required withdrawal for a 71-year-old is 7.38 per cent of the value of the fund, as at the previous Dec. 31.

There is no maximum for a RRIF, but there is a maximum allowable withdrawal from a LIF (Life Income Fund) which is a plan funded by a transfer from a pension plan.

At age 65 and beyond, the first $2,000 of regular RRIF or LIF payments each year qualify for the Pension Income Credit (unless the credit is already being used up by pension income).

RRSP rules and contribution limits

Any taxpayer who has contribution room (subject to the age restrictions) can put money into an RRSP. Every allowable contribution that is claimed on a tax return reduces taxable income by the same amount.

This reduces current taxes at that taxpayer’s marginal tax rate.

The limit is 18 per cent of “earned income” in the previous year, minus any Pension Adjustment (for members of a company pension plan), to a maximum of $22,000 in 2010 ($21,000 for 2009), plus any unused contribution room from previous years.

Earned income means employment or net self-employment income, net rental income, taxable support payments and CPP disability benefits.

People who moved in or out of a pension plan might also be subject to Past Service Pension Adjustments (PSPA), or Pension Adjustment Reversals (PAR). Your current limits (and these other items) are shown on your latest CRA Notice of Assessment.

Everyone is allowed to be up to $2,000 over-contributed to an RRSP at any given time. The penalty for exceeding that is one per cent per month of the excess. There is no longer any foreign content limit on the investments.

Beneficiary designations can be made so that the RRSP or RRIF avoids probate fees and passes directly to the beneficiary, though payment to anyone but a spouse (or a minor or disabled beneficiary) will result in the entire amount included in the terminal tax return of the deceased.

RRSP homebuyers’ plan

First-time homebuyers can “borrow” up to $25,000 of RRSP money tax-free to purchase a home, including shares in a co-op housing corporation.

“First-time” means neither of the spouses or common-law partners have owned a house in the previous four years.

Starting the second year following the withdrawal, one-fifteenth of the amount must be repaid to the RRSP each year or that year’s portion becomes taxable that year.

Check the rules carefully before withdrawing. There is also a First-Time Home Buyers’ Tax Credit, new in 2009.

There’s a lot to know.

Last week we talked about the relative merits of the RRSP and the TFSA in helping people save for retirement, and in future weeks, we will be making suggestions about investment strategy, for all types of investment plans.

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I was very proud Wednesday night, when my longtime colleague Craig Kepron, CFA, was officially handed his new Chartered Financial Analyst charter, the most distinguished global designation in the investment profession.

There are only 187 CFAs in Manitoba, according to the local chapter.

This is the culmination of a lot of work, as all such candidates know, so congratulations!

Since this officially makes Craig the “go-to” guy on our team for investment questions, I’m jumping in the Toyota and going on vacation.

See you in 10 days!

David Christianson is a fee-for-service financial planner and portfolio manager at Wellington West Total Wealth Management Inc. You can email him at dchristianson@wellwest.ca or visit his blog at www.davidchristianson.com