RRSP and Investment Terms

Some key terms to remember while navigating RRSPs and other investments are:

Annual Rate of Return
The return an investment provides over a period of time, expressed as a time-weighted annual percentage. Sources of returns can include dividends, returns of capital and capital appreciation. The rate of annual return is measured against the initial amount of the investment and represents a geometric mean rather than a simple arithmetic mean.

Annuitization
Annuitization is the process of converting an annuity investment into a series of periodic income payments. Annuities may be annuitized regularly, over a long or short time period, or in some cases, in one single payment.

After an annuity has been through the process of annuitization, the investment is said to have been annuitized. Annuitized investments are not necessarily paid out completely to the beneficiaries. Depending on the terms of the annuity policy, some of the money could go to the person’s estate, to a trust or to the insurance company, for example.
 
Annuity
Annuities are primarily used as a means of securing a steady cash flow for an individual during their retirement years. Annuities can be structured according to a wide array of details and factors, such as the duration of time that payments from the annuity can be guaranteed to continue. Annuities can be created so that, upon annuitization, payments will continue so long as either the annuitant or their spouse is alive. Alternatively, annuities can be arranged to pay out funds for a fixed amount of time, such as 20 years, regardless of how long the annuitant lives.

Annuities can be arranged to provide fixed periodic payments to the annuitant or variable payments. The intent of variable annuities is to allow the annuitant to receive greater payments if investments of the annuity fund do well and smaller payments if its investments do poorly. This provides for a less stable cash flow than a fixed annuity, but allows the annuitant to reap the benefits of strong returns from their fund’s investments.

The different ways in which annuities can be structured provide individuals seeking annuities the flexibility to construct an annuity contract that will best meet their needs.

Automatic Transfer
Automatic Transfers can be set up to transfer to loan payments or between other deposit accounts automatically. On a general level, it can mean any automatic transfer of funds between a member’s accounts. For example, a regular transfer from a chequing account to pay off a loan, or a monthly transfer from a chequing account to a savings account.

Company Pension
A type of retirement plan, usually tax exempt, wherein an employer makes contributions toward a pool of funds set aside for an employee’s future benefit. The pool of funds is then invested on the employee’s behalf, allowing the employee to receive benefits upon retirement.

CPP (Canada Pension Plan)
The CPP ensures a basic income for retired workers. If you have paid into the CPP, you are entitled to receive a monthly pension payment as early as age 60 or as late as age 70. CPP is based on how much, and for how long, you contributed to the plan and the age at which you choose to start your Canada pension payments. Should you choose to start your Canada pension payments earlier than age 65, your monthly CPP payment will be reduced by 0.6% per month for every month before 65. If you choose to delay retirement, your monthly CPP payment will be increased by 0.7% per month for every month after age 65 up to age 70.

Designation of Beneficiary
Your designation of beneficiary by means of a designation form will not be revoked or changed automatically by any future marriage or divorce.  Should you wish to change your beneficiary in the event of a future marriage or divorce, you will have to do so by means of a new designation.
Fixed Rate RRSP
A Fixed Rate RRSP provides the security of knowing your rate of return is locked in for a fixed period of time.

GIC (Guaranteed Income Certificate)
A deposit you make for a fixed period of time at a fixed rate. There are many options from which to choose when it comes to GICs and your Sunrise financial advisor can help you make the best choice. A GIC might be a good choice if you come into some money and don’t want to make an immediate decision about what to do with it. A GIC will ensure your money is safe and is earning a reasonable rate of return. All Manitoba Credit Union deposits and interest paid to the account are 100% guaranteed without limit through the Deposit Guarantee Corporation of Manitoba.

Income Tax Rate (Tax Bracket)
The rate at which an individual is taxed. Tax brackets are set based on income levels; individuals with lower income levels are taxed at a lower rate than individuals with higher income levels. Tax brackets serve as cutoff points for given income tax rates; therefore, if an individual’s annual taxable income exceeds the cutoff point, that person is taxed according to the next tax bracket.
 
Regular Deposits
An automatic transfer from your designated account to your RRSP, that is 100% guaranteed safe through the Deposit Guarantee Corporation of Manitoba.
 
Monthly OAS (Old Age Security)
The Old Age Security pension is a monthly benefit available, if applied for, to most Canadians 65 years of age or over who have lived in Canada for at least 10 years after reaching age 18. If your net income exceeds certain thresholds you must repay part, or all, of the maximum pension amount. The repayment amounts are normally deducted from the monthly payments before they are issued.
 
Mutual Funds
An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund’s capital and attempt to produce capital gains and income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus. An investment in mutual funds is not guaranteed by the Credit Union Deposit Insurance Company (CUDIC), any other deposit agency or the credit union/affiliate. An investment in mutual funds is subject to fluctuations in market value and a mutual fund’s past performance may not be repeated. Mutual funds are sold by prospectus only through a licensed salesperson.

RESP (Registered Education Savings Plan)
Planning ahead for your child’s education makes good financial sense. When you invest in a tax-deferred Registered Education Savings Plan (RESP) not only does your contribution grow but the federal government contributes a 20% bonus (up to $500/year).
 
RRIF (Registered Retirement Income Fund)
When the time is right and you are ready to retire, you may wish to consider rolling your RRSP into a Registered Retirement Income Fund (RRIF) which will result in a regular income flow for you. While your RRIF withdrawals are taxable, the principal remains tax sheltered and you can continue to manage your investment as you choose.

RRSP (Registered Retirement Savings Plan)
This is a savings account set up primarily for retirement savings. Contributions to a RRSP are generally tax deductible but withdrawals are taxed at your normal income tax rates. There are additional restrictions to how you can withdraw funds from this type of account. This government sponsored financial planning program allows Canadian residents to contribute 18% of their previous years earned income. If you have a company pension plan this may reduce your maximum annual contributions by what is called a “pension adjustment”.
 
Lifelong Learning Plan (LLP)
The Lifelong Learning Plan (LLP) allows you to withdraw amounts from your RRSPs to finance full-time training or education for you or your spouse or common-law partner. You cannot participate in the LLP to finance your children’s training or education, or the training or education of your spouse’s or common-law partner’s children. When you withdraw funds from your RRSP under the LLP, you have up to 10 years to make repayments to your RRSPs or PRPP. Usually, each year you have to repay 1/10 of the total amount you withdrew until the full amount is repaid. You do not have to pay any interest on the amounts you withdrew.
 
Home Buyers’ Plan (HBP)
The Home Buyers’ Plan (HBP) is a program that allows eligible individuals to withdraw funds from their Registered Retirement Savings Plans (RRSPs) to buy or build a qualifying home. People can withdraw up to $25,000 in a calendar year. Your RRSP contributions must remain in the RRSP for at least 90 days before you can withdraw them under the HBP, or they may not be deductible for any year. Generally, you have to repay all withdrawals to your RRSPs within a period of no more than 15 years. You will have to repay an amount to your RRSPs each year until your HBP balance is zero. If you do not repay the amount due for a year, it will have to be included in your income for that year.

RRSP Loans
Sometimes it’s not easy to have the cash on hand to invest in your RRSP before the tax year deadline for contributions. RRSP purchases can be made for the first 60 days of the year to reduce taxable income for the previous year. Sunrise Credit Union can help with an RRSP loan. We’ll show you how your RRSP loan makes sound financial sense as the cost of borrowing can be offset by your tax savings at year end. Your loan practically pays for itself.

Stocks (also known as “Shares” or “Equity”)
Stocks/Shares/Equity is a type of security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings. There are two main types of stocks / shares: common and preferred. Common stock/shares usually entitles the owner to vote at shareholders’ meetings and to receive dividends. Preferred stocks/shares generally does not have voting rights, but has a higher claim on assets and earnings than the common shares. For example, owners of preferred stocks / shares receive dividends before common shareholders and have priority in the event that a company goes bankrupt and is liquidated.

Tax Free Savings Account (TFSA)
This is a flexible savings account that allows Canadians 18 and older to save for any purpose and withdrawals are tax free. Investment income, including capital gains and dividends earned in a TFSA is not taxed, even when withdrawn. Contributions to a TFSA are not deductible for income tax purposes, unlike contributions to RRSPs. In recognition of the fact that people are likely to have multiple savings objectives at various stages of their lives – e.g. vacation, wedding, car, home or cottage – the full amount of withdrawals may be re-contributed to a TFSA starting the following year, to ensure that there is no loss in a person’s total savings. TFSAs keep you in control for short AND long-term needs.
 
Variable Rate RRSP
This type of RRSP ensures that your investment keeps pace with current interest trends. Interest rates are reviewed and adjusted regularly to stay competitive. A Sunrise variable rate RRSP provides flexibility by allowing deposits at any time.

 

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