RRSP / RRIF / LIF

RRSPs are personal retirement plans that are registered with the government to encourage saving. RRSPs are not specifice investments, but a vehicle used to hold a variety of investments and shelter them from taxes. Contributions are tax deductible and the funds inside an RRSP grow tax free.

A RRIF can be described as a continuation of your RRSP. It provides the same tax sheltering growth, but you have to take out a minimum taxable amount each year, based on age.

When you leave a company and are eligible to take your pension funds along, the funds must be transferred directly into a Locked-in RRSP. When you reach a certain age, you can start to receive income from this fund by converting it into a Life Income Fund (LIF).

RRSP's

Since RRSP contributions are tax deductible, they can greatly reduce the amount of income tax you pay each year. The following table demonstrates the tax savings and after-tax cost of four difference contribution amounts assuming a marginal tax rate of 33.10%. For example, if you contribute $5,000 you will save $1,655 in taxes ($5,000 x 33.1% tax rate = $1,655) making the after tax cost of your contribution only $3,345.

The earlier you start making contributions, the larger the value of your RRSP will be at retirement. If you delay making contributions, even just for a few years, the cost can be substantial.

If you start contributing $10,000 per year at age 26 at the beginning of the year and earn a return of 8.00% per year, your RRSP will be worth $1,713,168 at age 60.

However, if you delay 10 years and don't start until you are age 36, your RRSP will only be worth $721,059 at age 60 assuming the same 8.00% rate of return.

That means the 10 year delay will cost you $992,109 in retirement funds, a very significant cost indeed.