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TFSA or RRIF: The acronym guide to saving money

With the recent changes to the Tax-Free Savings Account (TFSA) and the Registered Retirement Income Fund (RRIF), your savings goals could be affected. In short, a RRIF starts out as a Registered Retirement Savings Plan (RRSP).
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With the recent changes to the Tax-Free Savings Account (TFSA) and the Registered Retirement Income Fund (RRIF), your savings goals could be affected.

In short, a RRIF starts out as a Registered Retirement Savings Plan (RRSP). The RRSP is a savings vehicle used to put money away for retirement, hence the name.

Once retirement approaches, you may decide to switch your RRSP savings into a RRIF in order to generate an income to live on. By law, you are required to trigger this income stream by age 71. Furthermore, you are also required to draw an income of no less than 7.38% annually from your RRIF.

However, the recent changes allow you to reduce your minimum withdrawal rate to 5.28% annually.

Yet if you trigger an income from your RRIF before age 71, the old withdrawal rate of 7.38% applies. Only the new rate of 5.28% applies to those ages 71 and beyond.

For those who qualify for the new withdrawal minimum rate, and have already met the 2015 minimum withdrawals based on the old rate, you may re-contribute the difference to your RRIF by Feb. 29 2016.

However, since RRIF income is fully taxable, your 2015 RRIF withdrawal will be taxed as usual. On the other hand, if you put the difference back into your RRIF, it will be considered a tax deductible contribution.

It is always best to first meet with a financial advisor to determine what sources of income you have in retirement and how the recent RRIF minimum withdrawal rate decrease may affect your retirement goals.

In addition to the RRIF withdrawal rate change, the government has announced a change to the minimum that may be contributed to the Tax-Free Savings Account (TFSA).

Recently I had touched on the differences between the TFSA and the RRSP by comparing the basic features of each. Here is a quick recap on what the TFSA is all about!

The TFSA is a savings vehicle for short and long term goals. In short, the TFSA provides a flexible solution for saving your money while not having to worry about being taxed on earnings or withdrawals.

Previous to the changes, savers were only allowed annual contributions of $5,500 into the TFSA. Nevertheless, unused room is carried forward each year. However, government has allowed an increase to the annual

contribution limit from $5,500 to $10,000.

Therefore, if you have not begun contributing to a TFSA since its launch in 2009, your total room to date amounts to $41,000 including the current year’s room of $10,000.

The TFSA is also becoming a popular option for saving for retirement since withdrawals are not taxable and also do not impact other federal income benefits such as Old Age Security (OAS).

Always meet with a trusted fFinancial advisor when planning your future to ensure all areas of your financial plan are best aligned with your goals.

*Proposed changes above are pending government legislation approval.

Heather Tarnopolsky is a Sun Life Financial advisor in Greater Sudbury.



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