Investment Products

RRSP

An RRSP (Registered Retirement Savings Plan) is a savings vehicle that allows you to push off income tax until later in life. When you contribute to an RRSP, you reduce your taxable income, and thus, the income tax you owe for that year; however, when you pull the money out of an RRSP (or RRIF…which is what an RRSP becomes when it grows up), it’s taxed as income.

The most common usage for an RRSP is to save for retirement. You contribute to it in your working years (higher taxable income) and then draw on it in your retirement years (lower taxable income). If it’s done correctly, this should lower the amount of income tax you pay throughout your life. You can use an RRSP for things other than retirement but that’s what it’s designed for.

Who is an RRSP right for?

A lot of people can benefit from having an RRSP in their financial toolbox but, it works the best for someone who makes a relatively high income during their working years with little to no planned retirement income – think of independent contractors or small to medium sized business owners.

You can have several different types of financial products in an RRSP – Stocks, Mutual Funds, Segregated Funds, ETFs, GICs, Cash, etc – but some work far better than others depending on you and your specific situation.

RRIF

A RRIF (Registered Retirement Income Fund) is what an RRSP becomes when it grows up. You use the RRSP to save and when you’re ready to withdraw from it, you convert it to a RRIF and it provides income in your retirement…which is taxable. You have to convert your RRSP to a RRIF by the end of December, the year you turn 71 and start withdrawing from it the following year. There are minimum annual withdrawal amounts you have to take from your RRIF (depending on your age) but there is no maximum – you could pull the entire thing out at once…but that’s not really advisable.

LIRA/LRRSP

A LIRA (Locked-In Retirement Account) and LRRSP (Locked-In Registered Retirement Savings Account) are basically the same thing. They’re both individually owned financial vehicles that have been funded by pension money – like, when you have a work pension from a previous employer. The difference is around the legislation of the original pension money; federally legislated pension money goes into an LRRSP and provincially legislated pension money goes into a LIRA.

You can’t contribute to either account directly from your own money (like with an RRSP or TFSA) – it has to come from pension funds. Because of that, there are rules on how and when you can access the funds. Typically, you can start to access the funds when you reach 55 (if you convert the account to a LIF/LRIF…more on that in the LIF/LRIF section) but you may be able to access some of the funds earlier in specific circumstances.

LIF/LRRIF

Similar to the relationship between an RRSP and RRIF, a LIF and LRIF are what a LIRA and LRRSP become when they grow up. When you have a work pension and leave that job, you have the option of moving that pension money into a LIRA or LRRSP (depending on the pension legislation) where it grows until you want to start drawing the money out. At that point, the LIRA/LRRSP converts to a LIF/LRIF and starts to pay you in regular intervals. Both accounts have a minimum and maximum annual withdrawal amount. Withdrawals from these accounts are taxable.

Just like with RRSPs and TFSAs, you can have many different types of financial products in a RRIF.

Mutual Funds

A mutual fund is a type of pooled investment where a fund company purchases several investment products (stocks/bonds/etc) and bundles them into a fund. They then sell units of that fund to investors. Mutual funds are typically a way to diversify your portfolio without the initial cost associated with buying all of the underlying assets directly.

Segregated Funds

A segregated fund is very similar to a mutual fund but structured under an insurance contract. They offer limited guarantees against market downturns and other insurance type benefits. Because of the extra cost from the insurance, segregated funds typically have a higher management cost than mutual funds.