RRSP, TFSA and RESP may not win you any points in Scrabble, but they'll pay off when tax time comes around! Although these acronyms and initialisms are well known, they're not always put to their best use. And what about lesser-known ones like LIRA, LIF or LLP? Would you know when and how to use them?
Angela Iermieri*, a financial planner at Desjardins, outlines some of the acronyms and initialisms and explains when to use them to your advantage.
1- Looking for a way to save tax-free?
TFSA: Tax-free savings account
A TFSA is more than just a savings account—it lets you save tax-free. However, there's an annual contribution limit. All Canadians ages 18 and over can contribute to a TFSA. Contributions aren't tax-deductible, but you don't have to pay any tax on your withdrawals. It's perfect for your short-, medium- and long-term goals.
2- Want to maintain your lifestyle during retirement?
RRSP: Registered retirement savings plan
It helps you build your retirement savings and gives you a tax break on your contributions. Annual contributions are based on earned income (18% of the previous year's income), and contribution room accumulates if you're unable to pay into it every year. You can also make contributions in your spouse's name. RRSPs are also eligible for the Home Buyers' Plan (HBP) and Lifelong Learning Plan (LLP).
3- Thinking of buying your first home?
HBP: Home Buyers' Plan
Withdraw up to $35,000 from your RRSP (up to $70,000 per couple) to buy your first home, without paying income tax. You'll have 15 years to pay back the amount withdrawn, at a rate of 1/15 annually. If you don't make the annual payback, the amount will be added to your income and will be taxable.
FHSA: Tax-free first home savings account
Thinking of purchasing your first home? You can open an FHSA right now. This registered plan lets you save tax-free between now and when you buy your home. You can contribute up to $8 ,000 a year, up to a lifetime limit of $40,000, and your contributions are tax deductible. When the time comes to purchase your home, withdraw the total amount accumulated in your FHSA including contributions and investment income. As with TFSAs, withdrawals are tax-free if used to purchase a qualifying home, and, unlike the Home Buyers' Plan, you don't have to repay the money withdrawn from your FHSA.
You can use the HBP and the FHSA if you're eligible for each plan.
4- Turning 71 this year?
RRIF: Registered retirement income fund
You must convert your RRSP to an RRIF no later than the year of your 71st birthday. You can do it earlier if you want. Once you open an RRIF, you must withdraw a minimum amount annually based on your age. Withdrawals are taxable because they're added to your taxable income for the year. You can choose different types of investments to keep growing your money until it's withdrawn. They are often the same as those eligible for RRSPs.
5- Want to ease your children's financial stress while they're in school?
RESP: Registered education savings plans
An RESP lets you save for your kids' post-secondary education while receiving generous government grants. The money grows tax-free.
Not sure you can afford it? Financial assistance is available for students from low-income families. Learn more about this financial assistance.
6- Leaving your job and don't want to leave anything on the table?
LIRA: Locked-in retirement account
When you leave your job, the amount accumulated in your employer's pension fund can be transferred to a locked-in retirement plan such as a LIRA (for pension funds under Quebec jurisdiction). This money is locked in, meaning that certain restrictions apply to when and how much you can withdraw.
You'll need to choose how to invest this money to keep it growing.
No additional deposits are allowed. To withdraw from your LIRA or other locked-in retirement plan, you'll need to convert it into a life income fund (LIF).
7- Ready to withdraw from your LIRA?
LIF: Life income fund
You must convert your LIRA, or any other Locked-in retirement plan to a LIF no later than the year of your 71st birthday. You can do it earlier if you want. A LIF is an extension of your LIRA, as it takes over when it's time to take money out of your locked-in pension plan. The life income fund has a minimum amount and a maximum annual limit, based on your age and the money accumulated.
8- Going back to school?
LLP: Lifelong learning plan
This is another RRSP-related government program that lets you finance a return to school by withdrawing up to $20,000 tax-free from your RRSP. You'll have 10 years to pay back the amount withdrawn, at a rate of 1/10 annually. If you don't make the payback, the amount will be added to your annual income and will be taxable.
9- Want to ensure the long-term financial security of a person with disabilities
RDSP: Registered disability savings plan
Generous government grants are available, based on family income. You may also be eligible to receive the Canada Disability Savings Bond (CDSB), without even having to make a contribution.
10- You're a shareholder or high income earner?
IPP: Individual pension plan
This defined benefit pension plan can be set up for business owners and high income incorporated professionals. Contributions under this plan are higher than those allowed under an RRSP and can be shared between the plan member and the business.