Your personal savings are an important third component of your total retirement income. As a Plan member, you can expect to receive your CAAT Plan pension as well as your government benefits when you retire. It's important, however, not to overlook the role your RRSPs and other savings vehicles will play in your total retirement income plan.
Your personal retirement savings plan can be seen as a two-step process. The first step is building up your personal savings - the investment decisions you make will ultimately determine how much income you will have when you retire. The second step involves paying yourself out of the funds you have accumulated.
RRSPs and income tax
Registered Retirement Savings Plans (RRSPs) provide you with the opportunity to grow your savings tax-free for retirement. Each year, you can claim an income tax deduction for the entire amount you have contributed to your RRSP, up to your limit. The interest you earn in your RRSP is also tax-sheltered - you only pay taxes on the amount that you withdraw. Therefore, not only can you save on your taxes in the years you contribute, but because you only pay taxes on RRSPs when you withdraw the funds, you may also be taxed at a lower rate when you withdraw the funds after you stop working.
Depending on the source of your funds, the RRSP you open can be locked-in or not locked-in. If you transfer funds to an RRSP from a registered pension plan (like the CAAT Plan) or other locked-in savings plan, the RRSP will also be locked-in – it can only be used as retirement income.
On the other hand, if you open an RRSP account at a bank or financial institution using cash, savings bonds or other after-tax assets, this RRSP is not locked-in and funds can be withdrawn and used before retirement if needed. The amount taken out, however is considered taxable income in the year it's withdrawn, unless it is used to purchase a home (under the Home Buyer's Plan), or to pay for your education (under the Lifelong Learning Plan). Information on these programs can be found on the Canada Revenue Agency's website.
Some RRSP income options
Once you retire, the emphasis shifts from funding your RRSP to managing the retirement income you have accumulated along with your government and CAAT Plan pensions. Those benefits, once you have applied for them, will provide a steady stream of income for the rest of your life. However when it comes to your RRSP, you must decide how to manage your assets to ensure you will have enough to see you through your retirement. RRSPs offer a flexible way to meet your retirement income needs by allowing you to enhance your income when you need to.
NOTE: you can continue to contribute to your RRSP after retirement only if you have contribution room remaining, or you’re earning employment income. Pension income is not considered ‘earned’ income.
You must stop contributing to your RRSP by the end of the year you turn 71. At that time, funds withdrawn from a non locked-in RRSP can be taken as cash (subject to income tax), used to buy an annuity, or transferred to a Registered Retirement Income Fund. However funds that were transferred out of a registered pension plan into a locked-in RRSP can only be used for retirement income in the form of an annuity, or a transfer to another locked-in vehicle. They cannot be taken as cash.
Some options are outlined below:
Registered Retirement Income Fund (RRIF)
RRIFs are similar to RRSPs, with the exception that you must withdraw funds from your RRIF on a regular basis. They are used to accept transfers of funds from non locked-in RRSPs and other investment vehicles. You must establish your RRIF by the end of the year in which you turn 71 and you must make a minimum withdrawal to use as retirement income each year. This withdrawal will be taxed at the appropriate rate. RRIFs are flexible in that you can control your investment, and, as with RRSPs, your earnings and interest accumulate tax-free.
Life Income Fund (LIF)
LIFs are similar to RRIFs but with additional restrictions. LIFs only accept transfers of locked-in funds from registered pension plans and locked-in RRSPs. As with RRIFs, there are minimum withdrawal limits, however LIFs also impose maximum withdrawal limits for each year. These limits are based on your age, so change throughout your retirement years.
Locked-in Retirement Income Fund (LRIF)
As with LIFs, LRIFs also accept the transfer of locked-in funds from registered pension plans and allow you to invest and grow your savings tax-free. LRIFs also impose minimums and maximums on the amount that you must withdraw yearly. However, LRIFs are meant to provide you with retirement income for life - there is no requirement to purchase an annuity at a specific age.
An annuity provides you with guaranteed income either for a specific period of time or for your lifetime. The financial institution, life insurance or trust company that issues your annuity is responsible for your investments and for paying you a stream of income for your retirement. How much you receive depends on the size of annuity you purchase and actuarial factors such as your age, sex and life expectancy. You can choose an annuity that pays you for life, or one that pays you for a specified period of time. Some annuities offer a joint and survivor option that will continue to pay your spouse when you die.
The above list provides a general idea of the options available to you, however it is not meant to be exhaustive. How you manage your retirement income will depend on your individual circumstances. As with all financial decisions, it's a good idea to research the available options and consult an independent investment advisor or financial planner for advice.