For most people, a Registered Retirement Savings Plan (RRSP) is the best
way to accumulate funds for retirement. An RRSP lets you save taxes at the same
time. Not only is the amount invested each year sheltered from taxation, but
earnings on assets in the fund are not subject to tax. The tax–free compounding
will make a huge difference in the amount of money you’ll be able to save for
retirement.
Comparing RRSPs and
Non–Registered Investments
There
is a growing belief that the new dividend tax credit system and a possible
deferral of capital gains (as long as those gains are reinvested within six
months) make RRSPs obsolete as tax shelters. This belief is not correct. The
new tax rules, if adopted, will alter the relative tax advantages of investing
inside vs. outside of an RRSP, but they will not eliminate the need for an RRSP
as a tax shelter. An RRSP has advantages beyond the tax shelter aspect,
including serving as a vehicle for creating a dedicated, conscious plan to
provide retirement income in the future.
Because fewer and
fewer people have company pension plans, the tax sheltering is so attractive,
and sizeable contributions can be made (up to $19,000 in 2007), millions of
dollars are invested in RRSPs each year.
Options at Retirement
Some people start
taking distributions from their pension plans immediately upon retirement.
Others defer payments as long as possible. They like to continue taking
advantage of the income tax–deferred growth accorded such funds. Further, they
may defer payments because they regard a pension account as a financial
reserve, to be tapped only when needed.
Distributions,
however, cannot be delayed beyond age 71. By that time you must convert the
RRSP to either a retirement annuity or a Registered Retirement Income Fund (RRIF.)
An annuity offers
the advantages of guaranteed payments and freedom from worry about how funds
should be invested; however, on death no residual is included in your estate.
The RRIF is more
flexible. You can control how the money is invested, and you can withdraw any
amount each year so long as you withdraw at least the minimum specified by the
Canada Revenue Agency. And usually, some of the RRIF will be left in your
estate on your death.
Charitable Gifts Using Retirement
Funds
If a spouse
survives you, he or she would ordinarily be the beneficiary of your retirement
funds. If you had an RRSP, your surviving spouse could keep the funds in a tax–deferred
plan. If you had already converted to a RRIF, your surviving spouse could
continue to receive payments, and they would be taxed only as received. If you
had opted for a joint-and-survivor annuity for you and your spouse, he or she
will receive payments for the balance of his or her life.
In the event that
minor children survive you, the retirement funds can be rolled tax–free into an
annuity paying them installments until
age 18. If the dependant is disabled (whether under or over age 18), a tax–free
rollover to an RRSP, annuity or RRIF is permitted.
Possibly,
however, you will not be survived by a spouse and have already made
arrangements for the children. In that case, leftover retirement funds make an
excellent charitable gift because the charitable tax credit will offset the tax
on the distribution. Leaving the funds to a beneficiary who is not a spouse or
dependant child or grandchild generally would cause the full value of the funds
to be taxed in the year of your death. With the charitable gift you preserve
the funds intact for your parish, the Diocese of Edmonton, or the Anglican
Church of Canada.
The recommended
procedure is to designate the Church as beneficiary of all or a portion of your
RRSP and RRIF funds.
Example: Barbara T, a single woman, dies at age 75 and
leaves $30,000 of her RRIF funds to the Diocese of
Tax on RRIF funds
(39% combined rate) $11,700
Tax credit
(Combined credit is 50% of
gift and entire bequest is creditable.) 15,000
The tax credit
will entirely offset the tax on the distributions because the creditable amount
of a charitable bequest is 100 percent of net income in the year of death.
Thus, if you choose to leave your leftover retirement funds for the Church, no
part of the funds will be consumed by taxation.
Retirement Funds and Giving
A charitable gift is one method of assuring that all, or most, of the
funds you spent a lifetime accumulating are used for the purposes you choose.
If you would like
more information, in confidence and without obligation, please complete and
return the Request
for Planned Giving Information form.