GOVERNMENT REGISTERED VEHICLES

The government has provided registered vehicles to help the individual prepare for the future such as: RSP, Spousal RSP, locked-in RRSP (LIRA), RRIF, LIF, LRIF, and for one's children there is a RESP. Within these registered vehicles there are a flexibility of investments that the individual can choose from.

INDIVIDUAL RRSP If you're looking for the single hottest investment vehicle around, it's an RRSP. It has tax breaks, many investment options suited to one's risk level. All this and more make RRSPs the best way to save for the future. While many people think that an RRSP is a specific type of investment, it's really just a special holding place. Just like an umbrella covers you from the rain a RRSP is an umbrella covering your investments from taxes.

The federal government encourages you to save for retirement; it allows you to put money into your RRSP every year, up to a certain limit. When calculating your tax bill, the amount you put into your RRSP becomes a deduction from your income for the year. Also any money you make on the funds inside your RRSP, whether through capital gains, dividends, or interest, it is not included in your taxable income each year. Therefore your money is compounding tax-free which means your profits work for you, making you more money every year.

This following chart shows the effects of compounding and does not predict or guarantee results. Accumulated totals will vary if investment amount, tax rate or rate of return is more or less than stated.

TOTAL INVESTMENTS RRSP VALUE AT AGE 65 Compounded Annually at 6 % Compounded Annually at 8% Compounded Annually at 10%

AGE 25 $1,000.00 a year for 10 years $10,000.00 $ 80,246.00 $157,435.00 $305,908.00

AGE 35 $1,000.00 a year for 30 years $30,000.00 $ 83,801.00 $122,346.00 $180,942.00

SPOUSAL RRSP There is one strategy that many married people can use to pay a lot less tax on their retirement income, and leave a lot more cash in their pockets. Here's how a spousal RRSP works. Often one half of a couple, can look forward to a much higher income in retirement than their partner. But that higher income also puts them in a higher tax bracket, and that means a higher tax bill. A spousal RRSP allows you to shift some of your RRSP contributions into your partner's hands. When your partner withdraws that money in retirement it qualifies as their income, not yours, and will be taxed at their lower marginal tax rate.

Although the contributor to a spousal RRSP earns a tax deduction, the money inside the plan belongs to their spouse. This is one of the main reasons some people have a resistance to using a spousal RRSP. However, this concern is usually misplaced. According to family law, if you and your spouse separate, your assets, including money in your RRSPs, will generally be divided fairly between you. It doesn't matter whether money is in your RRSP, your partner's RRSP, or a spousal RRSP. It will all be totaled up and added to the assets that will be divided between you.


LOCKED-IN RRSP
A locked-in RRSP is very much like a regular RRSP. The major difference is that since pension benefits are supposed to help you out when you retire, the federal and provincial governments have restrictions to prevent you from turning your pension into hard, spendable cash. That's why, if you want to move your pension benefits into an RRSP account, the money is "locked-in." You are prevented from withdrawing any funds or collapsing the plan until you reach a certain age.

RRIF A RRIF gives you all the same investment options your RRSP did, from T-bills and Guaranteed Investment Certificates to equities and mutual funds. Inside your RRIF, your assets continue to grow tax-free until you withdraw them. You maintain control over how your savings are invested, and can make transactions and rebalance your portfolio according to changing market conditions and your personal needs.

The major difference between the two savings vehicles is that you can not contribute to a RRIF. Instead, a RRIF requires you to withdraw a minimum amount each year based on your age. However, when you open a RRIF, you can choose at that time to have your withdrawals based on your spouse's age. You must start taking payments from your RRIF the year after you open it. But you can withdraw as much or as little as you want, as long as you take the annual minimum required by Revenue Canada. That means you have the flexibility to access extra funds if and when you need them.

Until recently, you had to wind down your RRIF by the end of the year during which you turned 90. Now Revenue Canada allows you to maintain your RRIF indefinitely. You must, however, start withdrawing 20% of your remaining funds each year once you hit age 93 or, alternatively, when your spouse does.

LIF A Life Income Fund is an appealing retirement income alternative for people who are liquidating their registered pension plans or locked-in retirement accounts. You can't open one until you are within 10 years of the normal retirement age stipulated by your RPP, which usually means you must be 55. And the deadline for starting a plan is December 31 of the year you turn 71.

A LIF works like the more familiar Registered Retirement Income Fund (RRIF), except that it must be used to purchase a life annuity by the time you are 80. Until that time, a LIF allows you to invest in a wide range of instruments, and shelters the income from tax until you withdraw it. You must start taking an income from your LIF of at least the minimum limits set by Revenue Canada one year after you open the plan. Unlike a RRIF, though, you cannot use your spouse's age to determine your withdrawal schedule. You can transfer the benefits to your spouse, name a beneficiary who will receive the remaining funds in a lump sum payment, or roll the LIF into your estate.

LRIFs
Unlike LIFs, LRIFs don't have to be converted to annuities. And the annual maximum withdrawal is calculated differently: you can take as much out as the investments in your plan earned in the previous year.


RESP
An RESP is a government- approved plan for the purpose of providing post-secondary education funding for a beneficiary. Income earned within the plan is not taxed until it is withdrawn. To be eligible, a beneficiary must have a valid social insurance number and be a Canadian resident at the time a contribution is made. In February 1998 Budget, the Government of Canada announced its intention to introduce a grant in association with existing Registered Education Savings Plan (RESP) program.

The Canada Education Savings Grant (CESG) program allows eligible RESP beneficiaries to receive grant monies based on annual contributions paid into the plan. The government will contribute 20% on the first $2,000 of annual contributions to an RESP for a beneficiary up to age 18. As well, contributors may carry forward any unused portion of their grant room to future years. The grant must be repaid if the beneficiary does not pursue higher education

GOVERNMENT BENEFITS

CPP / QPP Canada Pension Plan and its counterpart in Quebec, the Quebec Pension Plan are financed by mandatory contributions through payroll deductions. All Canadians, who have worked, either for a company or for themselves, are eligible for CPP/QPP. If you work for a company, the amount you have to pay into the system is split evenly between you and your employer. If you are self-employed, you are responsible for contributing the full amount yourself.

Traditionally, people retire at age 65, at which point they start receiving their benefits. However, as long as you have retired, you can start collecting your benefits as early as age 60, or as late as age 70. Collecting at age 60 your benefits are reduced by one-half a percentage point for every month you are short of age 65 and at age 70 the benefits are increased by one-half a percentage point for every month you are over 65.

CPP pays the benefits monthly. If a contributor dies, a lump-sum benefit is paid to their estate. If you are married, your spouse may receive a survivor's pension if they are 35 or over, or have a dependent child.

OAS
Old Age Security, is a benefit, available to anyone who is 65 and who meets certain residency requirements. In order to receive the maximum, you must have lived in Canada for at least 10 years leading up to the time you apply. However, if you were born after July 1, 1952, the rules are a lot more stringent. You will need to have at least 40 years of residency in Canada after turning 18 in order to qualify for the maximum. Payments start at age 65

Regardless of how much OAS you qualify for, you may not be able to keep some of it, or any of it. For starters, it is taxable. And, depending on your income level, some of your OAS payments may be "clawed back." Higher-income retirees face an income test. Effective since 1989, the clawback cuts OAS benefits by $15 for every $100 dollars your income, is above $53,215, and as a result, if your income is greater than $84,795, you will lose all of your OAS.