Locked-in RRSP Strategy
When discussing financial planning, it’s never too early to start saving for retirement. While there are many types of savings plans, an RRSP is a standard choice. However, there’s more than one approach to an RRSP, from contributing funds to withdrawing.
Your financial advisor can help you determine what type of plan works for you and how to navigate the ins and outs of a locked-in RRSP. Continue reading to learn more about how locked-in RRSPs work.
How an RRSP Works
An RRSP (registered retirement savings plan) is a financial savings account registered with the federal government. The tax-exempt account helps Canadians prepare for retirement.
The account holder can be an individual, or a spouse or partner can share the savings plan. Generally, only the annuitant(individual entitled to receive funds) can withdraw from the account.
Account holders or contributors can pay into an RRSP account or transfer funds directly from other savings plans, including:
How much you can contribute (per tax year) depends on your income. The maximum amount is based on the income listed on your Notice of Assessment when filing an annual tax return. Notably, contributions cannot exceed 18% of your salary for the previous year.
In addition to the maximum based on salary, there is also an RRSP contribution cap based on the year. For example:
2020: $27,230
2021: $27,830
2022: $29,210
2023: $30,780
The CRA (Canada Revenue Agency) allows some wiggle room, up to $2,000 above your deduction limit, before applying a monthly penalty of 1% tax.
There are exceptions to the maximum contribution limit, such as rolling over from a previous year or deferring RRSP deductions. Talk to your financial advisor about how your RRSP contribution strategy can reduce your taxes.
While you can contribute funds to an RRSP any time, the annual deadline for tax purposes is March 1. Monthly or yearly contributions are standard options, with monthly investments generally offering the most significant benefits. Account holders can contribute to an RRSP up to age 71.
How is a Locked-in RRSP Different?
Most RRSP accounts are not locked-in—meaning the account holder can withdraw funds anytime. An RRSP is tax-except but removing funds is taxable with the CRA bases rates on how much is withdrawn from the account.
For example, consider the following withdrawal amounts and tax rates:
Up to $5,000 — 10% (5% in Quebec)
Over $5,000 to $15,000 — 20% (10% in Quebec)
Over $15,000 — 30% (15% in Quebec)
A locked-in RRSP is a savings plan containing funds from a registered pension plan (RPP). Having a locked-in RRSP means the account holder or contributor cannot receive funds transferred into the savings plan. Depending on the pension laws of your province, the account may be referred to as a:
LIRA (locked-in retirement account)
LRSP (locked-in retirement savings plan)
RLSP (restricted locked-in savings plans)
The funds stay in the account until retirement age. You cannot withdraw funds directly from a locked-in RRSP. Generally, an RRSP matures when the annuitant turns 71, and the funds are transferred to an RRIF (registered retirement income fund). However, the terms of transfer can vary. For example, LIRAs are often transferable when the annuitant retires or reaches age 55.
Locked-in RRSP Withdrawals
Rules about locked-in RRSPs can vary from province to province; therefore, the exceptions about withdrawals before retirement also vary. Generally, the exceptions with early withdrawal include:
The annuitant having a reduced life expectancy
The annuitant being unemployed or having a low income
The annuitant becoming a non-resident of Canada
Having a LIRA balance below a certain amount
Benefits of a Locked-in RRSP
There are 2 main benefits of having a locked-in RRSP:
The funds are tax-exempt (as with all RRSPs)
Funds cannot be directly withdrawn
A locked-in RRSP builds funds for retirement and cannot be accessed before the agreed terms are met. Therefore, people who need an incentive to avoid dipping into their savings early can benefit.
However, it can be challenging if you need access to your money for rainy days. For example, you might have multiple plan types—such as a locked-in RRSP for retirement and a TFSA (tax-free savings account) for emergency spending. Knowing your options and the savings plans available can help you make the best decision for your future.
Talk About Your RRSP Options
At DeHaan Private Wealth, we realize that every client's financial situation is different, so we tailor your financial plan based on your goals. We help you develop a plan that works for you and make adjustments when needed. With us, you're never locked into one goal or strategy.
Set up a consultation today with Dehaan Private Wealth to learn more about RRSPs.