Registered Pension Plans (RPPs) and Registered Retirement Saving Plans (RRSPs)
What are the budget measures?
The 1996 Budget proposed four measures affecting RPPs and RRSPs:
- RRSP limits will be frozen at $13,500 through 2003, and then increased to $14,500 in 2004 and $15,500 in 2005. The limits for money purchase RPPs will be frozen at equivalent levels. The maximum pension limit for defined-benefit RPPs will be frozen at its current level of $1,722 per year of service until 2005.
- The age limit for maturing RPPs and RRSPs will be reduced from 71 to 69.
- The seven-year limit on the carry-forward of unused RRSP deduction room will be eliminated.
- The deduction for RRSP and registered retirement income fund (RRIF) administration fees will be eliminated.
Who is affected by the limit freeze?
- The freeze in dollar limits affects individuals earning over $75,000 annually. Those earning less than $75,000 will continue to be able to save up to the full 18 per cent of earnings limit.
- In 2005, when the limits will start to be indexed, full tax assistance will be provided on earnings up to twice the average wage. This treatment will target tax assistance toward the large population of modest and middle-income Canadians.
Why decrease the maturation age?
- The change brings the age at which individuals must mature their retirement savings closer into line with average retirement ages in Canada. The new limit will still allow four years of tax-assisted savings opportunities after age 65.
- Currently, people have to mature their RPPs and RRSPs by the end of the year in which they turn age 71. This age is being reduced to 69. The change will come into effect January 1, 1997.
- This means that individuals will have to start receiving their pension and either purchase an annuity with their RRSP savings or roll their RRSP to a registered retirement income fund (RRIF) by the end of the year in which they turn 69.
- In 1998, about 40,000 RRSP and RPP contributors will be affected. About another 100,000 persons may have to start drawing down savings earlier than planned.
If I'm 69 or 70 this year, do I have to mature my plan by the end of 1996?
- No. Special transitional rules will apply to people who are 69 or 70 at the end of this year.
- If you are 70 years old at the end of this year, you will not have to mature your RPP/ RRSP until the end of 1997, the year in which you turn 71. Therefore, you are allowed to mature your plan as if the old rule still applied.
- If you are 69 years old at the end of this year, you will have to mature your RPP/RRSP by the end of 1997, the year in which you turn 70. Therefore, you only have to mature your plan one year earlier than under the old rule.
What if I'm under 69 at the end of this year?
- If you are age 68 at the end of this year, you will have to mature your RPP/RRSP by the end of 1997, the year in which you turn 69. Therefore, you will have to mature your plan two years earlier than the old rule would have allowed.
- All individuals under age 69 at the end of this year will have to mature their plans by the end of the year in which they turn 69.
Do I have to liquidate my investments when I mature my RRSP?
- Not necessarily.
- If RRSP funds are cashed in or used to purchase an annuity, the investments would have to be liquidated.
- If RRSP funds are transferred to a RRIF, the investments do not have to be liquidated provided the minimum annual amounts are withdrawn from the RRIF. In general, if the RRIF is issued by the same institution as the RRSP, no liquidation of funds is necessary for the transfer to occur.
How much will I have to withdraw from my RRIF?
- There is a schedule of minimum amounts that must be withdrawn from RRIFs over time.
- You do not have to make a withdrawal in the year that you set up the RRIF.
- A withdrawal must be made in the year after you set up the RRIF - this would be at age 70 for a RRIF established at age 69. You must withdraw 5 per cent of the amount in your RRIF by the end of the year in which you turn 70.
- The existing RRIF minimum withdrawal amounts for age 71 and up will continue to apply. The minimum is 7.38 per cent at age 71, and it rises over time.
What if I have term deposits or Guaranteed Income Certificates (GICs)in my RRSP that aren't due to mature until I'm 71?
- First, it is expected that most individuals over 65 years of age would have some portion of their retirement savings in assets that could be cashed-in without difficulty - at least enough to meet the minimum withdrawal requirements under the RRIF rules.
- Term deposits can generally be redeemed in part before the maturity date. Therefore
individuals with term deposits should be able to meet the minimum RRIF withdrawal
- Some GICs allow interest to be paid on an annual, semi-annual or monthly basis. It is
expected that the interest earned on a GIC over a number of years would be sufficient to
cover the minimum RRIF withdrawal requirement for someone who is 70.
- For GICs that are locked-in until maturity, including the payment of interest, it is
expected that financial institutions would have an incentive, based on customer goodwill
and in terms of future business, to be understanding with their clients. This may include
accommodating situations where individuals may have to at least receive a portion of the
interest earned on their GICs in order to meet the minimum RRIF withdrawal requirements.
Will I lose two years of interest on my investment?
- Only the minimum RRIF withdrawal requirements must be met. As long as there are enough
funds available to meet the payments, investments can remain in tact.
Who will benefit from the removal of the seven-year carryforward limit?
- The removal of the seven-year carry-forward limit will assist those who have not made
maximum contributions in past years, but will be in a better position to contribute beyond
their annual limit in the future.
- Many Canadians may go through lengthy periods - usually early in their careers or when
they are raising children - when they are unable to set significant amounts aside for
retirement. The removal of the limit will make the tax system fairer and more effective by
allowing individuals to utilize their available RRSP room once they are in a better
position to save.
- This change applies to unused RRSP room since 1991 when the system of RRSP limits was
reformed and the carry-forward provision established. There is no carry-forward of unused
limits for years before 1991.
How will the deduction for RRSP/RRIF fees differ from their past treatment?
- Currently, administrative and investment counselling fees for RRSPs and RRIFs are
deductible if paid outside the plan.
- Recognizing that other RRSP/RRIF investment expenses are not deductible, and that these
plans already provide generous tax deferrals, the deduction for such fees will be
eliminated, effective March 6, 1996.