Mod 2 set 1- Individual - Old Age Flashcards
what does the economic problem of old age consist of?
- growing population of older ppl
- baby boomers - loss of income earned because of retirement
- many retire prior to 65 - longer retirement period
- ppl live longer, retire earlier - insufficient income and assets
- differences in elderly groups - poor health
- old ppl see docs more - LTC
- heavy property taxes
- can be income, rent can also be expensive - inflation
- other financial issues
- abuse of elderly
some techniques used to help address old age problems
- continued employment
- tax relief
- retirement planning programs
other source of retirement income not in “the pillars”
- post retirement employment
- working part time - provide intergenerational transfers
- reverse mortgages and other emerging techniques
- home equity turned into income
difference between retirement savings and retirement income
savings- efforts to save money for retirement
income- turning savings into income upon retiring
what are the two ways an individual can save for retirement
- savings in a registered plan
2. savings in a non-registered plan
what is non registered savings
-This is money saved outside of an RRSP or pension plan
-An individual can save for retirement in one of two main ways:
savings in a registered plan savings in a non-registered plan
– A key characteristic is that money invested comes from your after-tax income and thus this savings is not taxable when turned into retirement income (note: would still pay taxes on interest income, gains/losses unless money is invested in a TFSA, see below)
– an option for this type increasing in popularity is the Tax Free Savings Account (TFSA) introduced in 2009
TFSA Highlights
- 2009, tax saving vehicle
- contributions NOT deductible
- NO TAXES or intrest earned on gains/lossses incurred on investments inside a TFSA
- 18+
- withdrawls made are not included as income for federal government means tested benefits
- limits are indexed; 5500
- unused room accumulates
What is an RRSP?
- 1957
- designed to encourage individuals to save for their retirement on a tax sheltered basis
- important for self employed ppl
- 70% of workers who don’t have employer pension plans
Characteristics of RRSP
- contributions are tax deductible
- intrest income income an RRSP not taxable
- contributions, intrest income, and capital gains are taxable when withdrawn from RRSP
- withdrawls fully taxed
- can invest
- RPP can be transferred to RPP but may be locked in
RRSP eligibility
- must have earned income from employment in previous year OR
- have some RRSP contribution room carried from previous year
- you can deposit money into an rasp for you or partner
what can RRSP be used to purchase
-life annuity, RRIF, or fixed term annuity
Annual contribution limit for RRSP
unused room+ lesser of 18% earned income or max from that year - pa for preceding year
when can you withdraw from RRSP?
- anytime
- if you withdraw before retirement, any withdrawlwas will be taxed as income in year it is withdrawn
- RRSP issuer will withhold some of this tax to reduce taxes owing at annual tax filing
- you will have to claim the full amount of the withdrawl as income
what are the 2 exceptions where you will not be taxed if you withdraw before retirement?
- Lifelong learning plan: 20,000 can be withdrawn to pay for tuition, 10,000 yearly max
- Homebuyers plan: 25,000
to purchase to build home for first time owners
When is the last day to contribute to RRSP
dec 31 or age 71
deadline to transfer rrsp funds?
end of calendar year of your 71 birthday
4 ways you can turn RSSP into retirement income?
- Lump sum cash payment
- Life annuity
- RRIF
- annuity certain
What is a lump sum cash payment
This payment would be fully taxed when paid (as compared to the other 3 options, which allow transfer RRSP money tax free to another retirement income product)
life annuity purchase
(part or all of )RRSP funds used to purchase a life annuity
– The life annuity provides for a specified monthly income which is guaranteed for life of individual (larger amounts purchase larger monthly payments)
– The monthly income is taxable income(fully taxed)
– historically(until 1978) this was the only choice
Registered Retirement Income Fund
part (or all) of RRSP funds used to purchase a RRIF
– introduced in 1978 as a choice to allow more control over
the investment of the fund
– more flexibility in the timing of withdrawals (vs. annuities)
– Income Tax Act(ITA) stipulates what minimum monthly RRIF payments can be
o no withdrawal is required in year RRIF is purchased, but there is a minimum each following year
o RRIF minimum payout information will follow
– note that higher monthly payments can be chosen
– with RRSPs money grows tax free, whereas with RRIF, money is fully taxed on withdrawal (RRIF can be viewed as a reverse RRSP)
annuity certain
this give a specified monthly income that is guaranteed to be made until age 90
–
the term of the annuity equals (90 – age of annuitant) or can be (90 – age of the spouse)
RRIF minimum payouts
=MV at beginning of year x prescribed factor
