Retirement plan basics
Are you unsure about what the different terms and acronyms used in connection with retirement plans mean? We’ve explained some of them below.
RRSP: Registered Retirement Savings Plan. An RRSP is a tax-deferred growth savings vehicle.
RRSP deduction: The amount deducted from your tax return in connection with RRSP contributions that you made. This amount is generally limited to the lesser of your RRSP contributions or your RRSP deduction limit, although you can also deduct less than these amounts and preserve the RRSP deduction for a future year.
RRSP deduction limit: The maximum amount of RRSP deduction you can claim on your current year tax return. If applicable, current PAs, PSPAs and PARs (explained below) play roles in determining this amount. Your RRSP deduction limit appears as item “(A)” on the Notice of Assessment you receive from Canada Revenue Agency.
RRSP contribution: The amount of assets (generally cash) that you contribute to an RRSP. Contributions in the current tax year and the first 60 days of the next calendar year can be used as an RRSP deduction on your current year tax return, subject to your RRSP deduction limit.
Unused RRSP contributions previously reported and available to deduct: Past RRSP contributions you made that you chose not to deduct, or could not deduct as they exceeded your prior year’s RRSP deduction limit. Your unused RRSP contribution amount appears as item “(B)” on your Notice of Assessment.
Available contribution room: The maximum amount of additional RRSP contributions you can make for the current tax year that will provide a tax deduction. This figure appears as “(A)” minus “(B)” on your Notice of Assessment. Over-contributing to an RRSP may result in a penalty tax.
PA: Pension Adjustment. A PA reduces the amount of RRSP contribution room for employees who participate in a Registered Pension Plan (RPP).
PSPA: Past Service Pension Adjustment. If your RPP is enhanced retroactively, it requires some accounting (by way of a PSPA) of historical PAs.
PAR: Pension Adjustment Reversal. A PAR restores some RRSP contribution room lost by prior years’ PAs, typically arising if you leave your employer and your RPP benefits are lower than originally expected.
RRIF: Registered Retirement Income Fund. A RRIF is an option for the conversion of an RRSP and allows for continued tax-deferred growth. You must withdraw a minimum amount each year based on your age and a percentage of your RRIF assets.
RPP: Registered Pension Plan. RPPs are company-sponsored pension plans arranged by employers for their employees.
LIRA: Locked-in Retirement Account. A LIRA is similar to an RRSP but receives funds directly from a pension plan (or other locked-in vehicle) as opposed to contributions from an individual. Unlike an RRSP, you cannot make withdrawals from a LIRA in normal circumstances. LIRAs are typically converted into LIFs/LRIFs when retirement income is desired from the funds.
LRSP: Locked-in Retirement Savings Plan. Some jurisdictions refer to LIRAs as LRSPs.
LIF: Life Income Fund. LIFs are similar to a RRIF but funded from a LIRA/LRSP or RPP. Unlike a RRIF, these funds are “locked-in” as there is a maximum amount that can be withdrawn annually from a LIF. In some jurisdictions, there is an ability to unlock some or all of the assets held in a LIF so that withdrawal restrictions do not apply to the unlocked portion.
LRIF: Locked-In Retirement Income Fund. LRIFs are similar to LIFs, although LRIFs are used in fewer provinces.
If you own and participate in retirement plans, your advisor can help you understand the terminology and rules associated with your plans. Note, the RRSP contribution deadline for the 2016 tax year is March 1, 2017.