Ch10: Retirement Savings And Other Special Income Arrangements Flashcards
What are the retirement savings vehicles?
Registered retirement savings plans (RRSP)
Registered pension plans - employees only (company plan, RPP)
Registered retirement income funds (RRIF)
Pooled registered pension plans (PRPP)
Deferred profit sharing plans - employees only (DPSP)
What are the types of pension plans?
- Defined benefit (government plan)
- employer agrees to provide benefit of some percent of employee’s average earnings for each year of service.
- yearly pension = 2% x number of years worked x average salary of last 3 years.
- employer at risk to ensure enough money is in the plan to pay the pension in the future. - Defined contribution (a.k.a. Money purchase) (most pension plans)
- employer agrees to provide specified contribution.
- benefit based on amount of contributions and their accumulated earnings.
- whatever the plan earns is what you receive.
- employee at risk, because may not receive what he excepted at retirement.
- note that RRSPs, RRIFs, and DPSPs are essentially defined contribution plans.
What are the basic concepts of RRSP?
Deduct contributions when made.
Tax free earnings while they accumulate in the plan.
Taxed on withdrawal from the plan.
Explain RRSP calculations
Unused RRSP room preceding year (given)
+ lesser of (1) RRSP dollar limit for year (2023: 30,780), and (2) 18% of earned income of prior year (given)
- PA of prior year (given)
= RRSP deduction limit for year
- RRSP deduction claimed in year
= Unused RRSP room end of year.
PA: pension adjustment. Indicates that you have a RPP or DPSP at work. Prior year amount.
—> allows employees that don’t have a pension plan at work to contribute more to their RRSPs than employees that do.
To get a RRSP deduction, you must have made a contribution to your RRSP and have a RRSP deduction limit. You are not obliged to deduct amounts you contribute in the year you contribute, you can carry the undeducted contributions over to other years.
Undeducted RRSP contributions from prior years
+ contributions made in the year
- RRSP deduction claimed in year
= Undeducted RRSP contributions end of year
What is earned income?
Earned income is the sum of the following:
- employment income
- business income (loss)
- disability payments
- royalties (increases if creator of asset)
- net rental income (loss)
- net research grants received
- spousal support received (paid)
What are penalty for excess contributions?
Contributions that are $2,000 greater than the unused deduction room at end of year.
- max contribution to RRAP allowed without a penalty = RRSP limit + cushion 2k
- penalty of 1% per month.
What are options at retirement?
At age 71, you must collapse your RRSP.
- can take a lump sum withdrawal (included in income, stupid)
- can purchase annuities (included in income over time)
- can transfer to RRIF tax free (amount to include in income thereafter)
What are spousal RRSPs?
Contribute to your spouse’s RRSP instead of yours.
Benefits: income splitting and additional pension credits.
Attribution rules: if you withdraw the funds contributed to your spouse’s RRSP before 3 years, the income is added to your income and not your spouse’s.
What are home buyers’ plans (HBP)?
Qualifying withdrawals:
- up to 35k per individual
- purchase of a qualifying home by October 1 of year following withdrawal.
- must occupy within one year.
- cannot have owned a home in the previous 4 years (exception for disabled individuals and for marriage).
Limit on RRSP deductions:
- example: balance of 10k, contributed 5k, withdraw 15k within 90 days of contribution => no deduction allowed for the 5k contribution.
Repayment:
- second calendar year following withdrawal
- no maximum
- minimum as per formula
- if payment is missed: added to income and deducted from balance owing.
- if excess is paid: reduces balance owing but doesn’t change the applicable fraction.
What are lifelong learning plans (LPP)?
Limits on withdrawal
- 10k in any one calendar year
- 20k maximum over four calendar years
Who qualifies?
- full time enrollment - qualifying educational program in year of withdrawal.
Limit on RRSP deductions
- same as home buyers’ limit.
Repayment:
- must begin within 6 years
- repay over 10 years straight line (1/10, 1/9, 1/8, etc.)
What is included in RPPs?
Include in income amounts received.
What is included in RRIFs?
Establishment: only transfers from other plans.
Withdrawals:
- no maximum
- minimum per year (under 71): FMV / (90-age)
- minimum per year (70+): 5.28% of the value at age 71, 20% of the value at age 95 and subsequent.
Include in income amounts received.
What is included in DPSPs?
Contributions: employer only
Earnings in the plan: accumulate tax free
Include in income amounts received
What are salary deferral arrangements?
The problem: arrangements established to defer taxation.
The solution: tax employee when benefits are earned if payments are more than 3 years after payor’s year end (employer has to deduct in current year, and employee has to include in current year, not when received in 4 years).
