Retirement Planning Flashcards
Unvested DC Plan Monies Returned
Your contributions + Your Interest + Employer Interest
RRSP Earned Income
- Net income from employment
- Net income from business
- Net Rental from RE
- CPP Plan
- Spousal Support
RRSP Limit
2021 RRSP Limit $27,830
2020 “ “ $27,230
2019 “ “ $26,500
RRSP Contribution Calculation
- 2021 RRSP Limit $27,830
- Calc 18% of earned income (previous yr.)
- Use Lower of 1 or 2
- Less** any PA (**previous yr.)
- Less** any PSPA (**current yr.)
- Add** and PAR (**current yr.)
- Equals current year’s RRSP contr. limit.
- Add unused RRSP contr. room all previous yrs.
- Equals total RRSP contribution limit.
- Add $2000 lifetime allowable over-contribution.
- Equals maximum allowable contribution limit.
Retirement Allowance Rollover Rules
Before ‘96, # yrs of service x $2000 +
Before ‘89, # yrs unvested x $1500 = RRSP rollover
RRSP Earned Income Deductions
- Losses from Business
- Deductible spousal support paid
Pension Adjustment Calculation
First Calculate benefit of DB plan
average or best yrs or final income x 2% = Benefit
Pension Adjustment or PA = (9x Benefit) -600
Annuity Income to include in Income
months of income x interest received x monthly income received
DPSP Rules
- May withdraw vested DPSP in cash
- Not a formal DPP
- Only Employer can contribute
- Based on profits to a Max 18% or Max $27,830
- Savings sheltered until withdrawn
- When retiring may: receive a lump sum in cash, transfer funds to RRSP or RRIF, use funds to purchase an annuity
Individual Pension Plan (IPP)
- is a defined benefit plan, contributions actuarially determined
- IPP contributions could exceed the RRSP contribution limit
- contributions will not vary with corporate earnings
- does not need to have more than one member.
Spousal RRSP
- Contributions are deducted to the contributing spouse
- If the spouse uses the RRSP assets to purchase an annuity of RRIF…then no Attr.
- a spousal contribution will not affect the spouse’s personal contribution room
- attr rule affects funds contributed this year and the 2 previous yrs.
Yearly Maximum Pensionable Earnings (YMPE)
- as defined under the Canada Pension Plan
- for 2021 YMPE is $61,600
- for 2020 YMPE was $58,700
Unreduced Pension
- Earliest age without reduction = (age joined the plan + Qualifying Factor / 2
Money Purchase Plan (MPP) or DC Plan
- Contributions to MPP by employees reduce their taxable income directly
- An employer can deduct their contributions
- Payment is taxable to the employee
- Funds inside the MPP grow tax-free, however, funds paid out are considered taxable income to the plan member
Strip Bond Interest Calc?
Semi-annual discounting is used
Attribution of a spousal RRIF
- if within the 3 yrs then attribution applies to anything above the RRIF Min
Receive Shares DPSP
- if leaving the company then can take the shares and report the cost as a taxable benefit
- then make a contribution to his RRSP within 60 days after the end of the year received…this will offset the taxable benefit
- can also transfer the shares directly to his RRSP, DPSP or RPP at FMV.
DC Plan Features
- DC plans appeal to smaller companies as contributions are fixed…usually as a % of income.
- level of benefits is dependent on investment results and max pension is unpredictable
- Max pension amount $3245.56 only applies to DB pensions
- Accumulated amounts to a LIRA if leave the plan
- No inflation protection under a DC Plan
- If leaving a DC or DB plan…transfer to a LIRA or LIF or Deferred Life Annuity, or to another pension plan
GIS and Allowance
- both are reported as part of total income
- BUT amounts are deducted in the calc of taxable income…so effectively exempt from tax
Is U.S. source income earned by a non-resident taxed?
- Does not form part of earned income
- What is…
Employee profit-sharing allocations
Taxable alimony receipts
Net Rental Income
Canadian source employment income while a non-resident
RRSP to RRIF specifics
- If you contribute to the RRSP before it’s a RRIF, you don’t have 60 extra days like other years.
- Can’t contribute to a RRIF
- excess contributions subject to a 1% monthly penalty
CPP Orphan Benefit rules?
- Must be enrolled in school full-time and be 19 or under
- if enrolled would qualify until finished or reached 25 yrs
Pension Calculations and the PA
- Is an estimation of the value of an individual’s pension
- the PA is the amount an RRSPs member can contribute annually
- PA ensures that all taxpayers have access to comparable tax assistance
- for DC Plan…employer and employee contributions
- for DB Plan PA = (9 x Annual accrual benefit) - $600
- annual accrual benefit formula…find first…PB = factor x avg. salary x #yrs
- PA = (9 x (factor x avg. salary x #yrs) - $600… combined to one formula
DPSP and payout to employees or survivors
- Amounts vested are payable no later than the end of the year the employee attains 71 years of age and 90 days after the earliest of:
- the death of the employe
- day ceases to be employed
- the termination or winding up of the plan
Life ONLY Annuity
- Highest Income as payments cease on death
- only one life…no spousal benefit
- no survivor benefit
PSPA
- PSPA increases the benefits to an individual for past years of service
- so you will have to deduct in current yr
Transfer In-Kind
- Refers to the transfer of an asset from non-reg to an RRSP account
- the Market value of the transfer is considered to be the contribution
- This type of transfer will trigger a deemed disposition (trigger CG)
- the individual can claim a tax deduction for the contribution, however, transfers to RRSPs cannot be used to trigger capital losses for tax purposes.
Pension Benefits and Disability
Example Ron DB plan 25 yrs of service
starts to receive disability insurance benefits at 55 yrs of age
At 65…received a full pension based on 35 yrs NOT 25
LIRA
- Cannot be purchased with cash
- Can only withdraw if: death, reduced life expectancy, non-resident of Canada for two years
- LIRA must be converted to a LIF or life annuity to access funds
What are “Forfeitures” in a DPSP?
- member terminates membership prior to vesting
- all claims on employer contributions are forfeited
Individual Pension Plans (IPP)
- best for 45 yrs or older and earns T4 income
- provide significantly higher contributions than RRSP
- more tax-sheltered savings for retirement
- are a form of a Pension Plan, they are entirely creditor proof
- They may be subject to division to support obligations (Divorce)
Take Pension Now or Later Comparison
4 Steps to comparison
- What is the pension worth at retirement age?
Find PV of annuity calc - Discount that amount (as FV) back to today to find PV to know what the pension is worth today.
- Compare it to what the pension is worth if I take the reduced monthly PMT if retire today. The pension over a longer time.
- The last step is to subtract one from the other to deduce which is the higher amount and by how much.
Legal Expenses, Wrongful Dismissal, Retiring Allowance
- $21,000 in legal fees, $36,000 award
- Can carry forward the legal expenses and deduct it against the award
- then…transfer the difference of $15,000 to her RRSP as a retiring allowance
- Retiring Allowance is also called Severance Pay
- includes…unused sick leave, money received, amounts for damages
- DOES NOT INCLUDE…Superannuation or pension benefit, no death benefits, no benefits from counseling, payment from accumulated vacation, no wages in lieu of termination, or damages for violations of human rights
If we see the words ‘in today’s dollars in a question, how do we interpret that?
- Than means, it is already ‘adjusted for inflation’
- no need to use the formula i=Rn-inf/1+inf to incorporate inflation or adjusts the cashflows for inflation
What is the appropriate discounting rate to use in retirement?
The inflation Rate
What is it to say we are discounting cashflows?
- Discounting is the process of determining the present value of a payment or a stream of payments that is to be received in the future.
- Given the time value of money, a dollar is worth more today than it would be worth tomorrow.
- Discounting is the primary factor used in pricing a stream of tomorrow’s cash flows.
What amount would you need today
if you were to earn 5% and wanted $1000 in 1 year,
and what is the discount rate?
The discount rate is 5% as given
the formula is $1000/1+.05 = $952.38 is what you would need today to have $1000 in 1 year.
If you sold your house and bought a non-registered annuity (which you have to) what is taxed when you take income?
Only the interest portion from the annuity.
If you had a RRIF and wanted to buy an annuity what kind would that be?
How would it be taxed?
A Registered Annuity
Both principal and interest portions are taxed. Because it was deferred growth and eventually needs to be taxed.
100% of the money received is taxed at your current MTR
Where do Prescribed and Non-prescribed annuities come from?
How are they taxed?
Prescribed
- Prescribed annuities (accrual annuity) use non-registered funds. Therefore, the payments consist of repayment of part of the principal (not taxable) and interest (taxable).
- Payments from a non-prescribed annuity are a blend of interest and capital.
- Level taxation
Non-Prescribed Annuities
- REGISTERED ASSETS
- The interest element is taxed as it accrues; therefore the taxation will be higher in the early years of the annuity and decrease over the life of the contract as the capital is paid out.
- Not level payment.
- Non-Registered funds are the source as well.
Where do Prescribed and Non-prescribed annuities come from?
How are they taxed?
- Prescribed… non-reg assets used for this…level taxation!!!
- Distinct advantage*
- Non-Prescribed…registered assets …tax is higher in early years
- Fully Taxable…purchased with RRSPs, RRIFs*
In the early yrs of a normal annuity/ordinary annuity/non-prescribed annuity describe the payment of interest and principal
- The interest portion is large in the beginning or early years.
- Over time the interest portion gets smaller and the principal gets larger.
- Uneven tax burden over the years
What type of funds are used to buy a prescribed annuity?
Non Registered funds.
With a prescribed annuity using non-registered funds, what is the tax treatment? And what dollars were used to purchase it?
Only the interest is taxable as taxed dollars were used to purchase the annuity in the first place
Prescribed Annuity = ?
Non-Reg funds and Level Taxation
taxed as ordinary income
not capital gains, dividends or interest
capital and growth
Non-Prescribed Annuity = ?
Registered and Uneven taxation
Interest high in early yrs
Uneven tax burden
If you wanted to sell your home what type of annuity would you buy and what type of income would it give you?
I would buy a prescribed annuity because the proceeds of my home sale are non-registered funds and this would give a level income.
What is a straight life annuity?
- It is an annuity that will pay out over my lifetime and end at my death.
- No remaining value at my death so no inheritance available
What is a fixed-term guaranteed annuity?
- This annuity will pay for the lifetime but also
- if you were to die during the guarantee period then a lump sum payment could go to your beneficiaries.
Name 6 types of Annuities and characteristics?
- Lifetime Annuity… risk-averse candidates & can link to inflation, also guarantee periods available.
- Term-Certain Annuity…set period of time. Maturity amount at the end minus $ paid out. Maturity amt can be paid to the beneficiary as lump or payments for the remainder of term.
- Enhanced Annuity (Impaired Life Annuity)…shortened life expectancy. Higher-income. Some jobs could mean higher income.
- Variable Annuity (Investment-linked Annuity)…lifetime but part is linked to investment performance. Fixed and variable income received.
- Prescribed Life Annuity…non-reg funds. Each annuity payment includes a return of some of the principal…no tax on this portion but only on the interest.
- Non-Prescribed Life Annuity…reg funds used. fully taxable
Which type of annuity will allow you to leave an inheritance but provide an income?
Fixed-term guaranteed life annuity
Before you buy an annuity, you need to decide 2 things?
- whether or not you want the annuity to continue to be paid to a beneficiary after you die
- whether you want regular income payments or income payments that will increase or decrease regularly
A life annuity provides you with what kind of income?
When does it start after you open an annuity?
- Guaranteed income for life to begin no later than the second year after purchase
- In most cases, your life annuity payments stop when you die. No money goes to your estate or named beneficiary.
Some annuity providers offer the following 3 options,
so that payments continue after you die:
- a joint and survivor option: income payments continue as long as one of the annuitants is alive
- a guarantee option: income payments continue to be paid to a beneficiary or your estate if you die within a specific amount of time
- a cash-back option: provides a one-time payment to a beneficiary or your estate if you die before receiving a specific amount of money (usually the amount you paid for your annuity)
- You can combine these options, but each additional feature will lower the amount of your income payment.
How does a Term-certain annuity pay during and after the term?
To who and how does it payout?
- guaranteed income payments for a fixed period of time (term). If you die before the end of the term,
- The beneficiary or estate will continue to receive regular payments.
- They may also receive the balance of the regular payments as a lump sum.
How does a Variable annuity work?
What are the two parts?
Who is it good for?
- The provider invests your money in products with a variable return, such as equities.
- You receive a fixed income and a variable income. The fixed income portion is usually lower than what you would earn with a non-variable annuity, such as a life or term-certain annuity.
- The variable portion is based on the performance of the investment.
- If you have sufficient retirement funds and are not risk-averse, have investment knowledge, etc. Not your last dollar.
If you are a couple who would like an annuity which might you choose?
Joint Life Annuity
If you want a level income from your annuity which would you choose?
I would choose a Prescribed annuity.
This comes from Non-Reg funds
What is the difference between an annuity due and an ordinary annuity?
- Annuity due is an annuity whose payment is due immediately at the beginning of each period.
- Annuity due can be contrasted with an ordinary annuity where payments are made at the end of each period.
- A common example of an annuity due payment is rent paid at the beginning of each month
Which Annuity is the most tax-efficient, how is it paid out, and when do you elect to make a distinction in the type?
- Using a prescribed life annuity is one of the best ways to generate tax-efficient income.
- The owner receives regular income payments which are comprised of capital and interest income.
- How the interest income is taxed depends on whether the owner elects “prescribed” or “non-prescribed” taxation when the policy is issued.
How is a non-prescribed annuity taxed and what is the source of funds?
- The interest income is fully taxable at the owner’s marginal tax rate.
- The owner pays significantly more tax in the early years (when the interest portion of the annuity payment is largest), with the taxable portion reducing over time.
- The source of funds are registered assets as the taxation of those dollars had been deferred until withdrawn…so fully taxable. RRSP, LIRA, RPP, LRIF
What is a qualified annuity?
US or Canada?
- A qualified annuity is a retirement savings plan that is funded with pre-tax dollars.
- Contributions to qualified annuities are deducted from an investor’s gross earnings and, along with investments, grow tax-free.
- Neither is subject to federal taxes until after retirement when distributions are made.
What is the benefit accrual formula for DB pensions?
Multipliers are sometimes known by other terms, such as “accrual rate” or “crediting rate” but they mean the same thing.
A typical multiplier is 2%. So, if you work 30 years, and your final average salary is $75,000, then your pension would be 30 x 2% x $75,000 = $45,000 a year.
What is the formula for finding the earliest retirement age to receive a full pension?
- Age + Yrs of service = Qualifying Factor
- Sometimes you know the QF might be 85.
- So 85-30 yrs of service = 55 yrs of age to retire at the full pension.
Calculating the Pension Adjustment for RRSP contributing.
What annual accrual benefit formula?
What is the PA formula?
- First calculate 18% of the earned income all sources in the previous yr.
- Find Benefit Entitlement to use in the PA formula. if not given the benefit.
- # Yrs service x QF x benefit 2% = BE
- This number minus the PA
- But find the PA…using formula PA= (Benefit x 9) -600
- The contribution limit is the contribution limit less PA
For RRSP purposes what are the earned income types?
What can you subtract?
- Net income from employment
- Net income from business
- Net rental income from RE
- CPP
- Spousal support payment
- Less…losses from bus, RE, and deductible spousal support paid
Calculation earned income, how do you treat Child support and Alimony?
Also, when do you factor in severance paid?
- Child support not counted
- Spousal Support/Alimony is counted
- Severance is calculated for the year received
- Severance can be directly transferred to an RRSP if there is enough contribution room.
- There is no PA adjustment if you were not a member of the plan in that year and there was no contribution.
- Commissions are counted as earned income
When are you entitled to a PAR?
- When membership in an RPP is terminated without having been paid any retirement benefits, people are sometimes entitled to a PAR
- The purpose of the PAR is to give back some of the RRSP contribution room that would have been lost due to contributors’ PAs while they were a member of the plan.
- If contributions were IMMEDIATELY VESTED then no PAR.
- PAR is based on funds not vested in the plan when membership ended.
What is mental accounting?
- Refers to the situations where individuals apply inconsistent risk/reward objectives to different portfolios, rather than thinking of all of their assets as one coordinated and correlated portfolio.
- Mental accounting can also apply to income sources.
- Thinks of one source of income as expendable (or extra) and does not apply a consistent rational spending approach.
If someone is mental accounting how should you advise them?
- You should recognize the bias and explain that this type of thinking could lead to sub-optimal portfolio asset allocations, exposing her to undue (or inappropriate levels of risk)
- Also make them aware that the rational approach would be to treat all portfolios in line with the risk tolerance of the individual, no matter what type of account it is. (i.e. RRSP or non-registered)
- Also make aware that a consistent attitude towards income, no matter what the source, would allow for easier planning and achievement of her short and long-term goals.
Explain how to calculate the CPP payment requirement by employees and employers and how it relates to YBE and YMPE
It is range-bound.
Use the income you earn between the YBE ($3500) and the YMPE for the current year.
If you are self-employed then you multiple the CPP rate x 2
YMPE -YBE x CPP Rate (for either Employee (x1) or Self Employed doubled (x2)) = Contribution Required
If you apply today for CPP benefits and it is Jan 15, when will you state to collect the benefit?
Beginning of the next full month
Feb 1
If you applied and are going to receive CPP credit splitting.
When do you first start to receive the benefits?
Not until 60 at the earliest and 70 at the latest.
Don’t get tricked by the fact that you have to apply early!
How soon after you have a separation from your spouse or partner do you need to apply for CPP credit splitting?
4 years for common law
no expiry for legally married couples
How do you calculate CPP Credit splitting?
- As long as the total of the two incomes of the spouses is
- > 2 x the YBE…$7000
- Combine the total credits accumulated by both parties, totalling them together and then splitting them.
- No splitting for years both unemployed for example
- Calc example ($125,000 + $0)/2 = $62,500 is the record of income for CPP purposes and the other spouse will have the same record.
- The same process will be applied to each year together minus the final year.
What are the details and rules around the calculation and time limits of the CPP Credit splitting?
- Both parties do not need to agree
- Must be done within time limit 4 yrs or unlimited time
- The split must be effected unless stated in a separation agreement
- The formula is set out by the Canadian Government
What effect do children have on credit splitting?
The presence of Children has no effect.
What is the significance of June 1986 for CPP Credit splitting?
After this date, it is unlikely that any document from divorce or separation would deny credit splitting.
Highly unlikely for someone to be denied credits.
What is the qualifying age to receive GIS Income Supplement and what are the current thresholds for singles and couples?
Age 65, Use last yrs income to qualify
$19,248 Single Widowed Divorced
$25,440 Partner full OAS
$46,128 Partner No OAS
$46,128 Partner full Allowance
What sources of income are used to qualify for GIS Income Benefits?
- Employment or Self-employment Income
- Net Rental Income
- Investment Income: Div Int CG
- CPP pension Income
- RRP and RRIF Withdrawals
- EI Benefits
- Alimony
- WCB
What income is excluded from the calculation to determine income for the GIS income supplement?
- OAS
- GIS
- Allowance
Is there a clawback on GIS?
- GIS is one of the most generous benefits in Canada and because of this it also comes with some extremely high “clawback” rates.
- GIS benefits get reduced as household income increases. This reduction is called a “clawback” rate because it “claws back” benefits from higher-income households.
What are the income thresholds before clawback and when can you receive benefits?
- Income over $5000 plus 50% of the next $10,000 at a rate of $0.50 for every dollar of income. Must have a combined income of less than $24,567
- You can receive your first payment the month after you turn 65. You must file your taxes on time every year to avoid any disruption to your payments.
Are GIS income benefits taxable?
What about OAS and CPP?
GIS Benefits are tax-free!
OAS and CPP benefits are taxable
Do TFSA withdrawals affect GIS?
TFSA withdrawals are not considered income and do not have any effect on GIS (or other income-tested benefits) qualification, nor do they result in any clawback.
What are the steps to calculate a career average benefit plan and the formula?
- Know the number of years to use in the calculation and the increases if any
- Find the average
- Calculate the Benefit. Formula
= (Career Average Salary) x (Benefit %) x (Years)
How do you calculate the Flat Benefit Amount?
Entitlement = (Monthly Benefit) x (# Months) x (Years)
Entitlement = ($110) x (12) x (15)
Entitlement = $19,800
Under the Flat benefit plan if you were to die what benefit would your spouse get if they were entitled to 70%?
Entitlement = (Monthly Benefit) x (# Months) x (Years)
Entitlement = ($110) x (12) x (20) x (70%)
Entitlement = $18,480
What limitations are there if you wanted to negotiate your pension benefit entitlement?
According to the Pension Act, the limitations would be a max of 2% allowable per year of service multiplied by the best 3 year average of pensionable earnings.
The max pension benefit is $2,914.44
Max benefit $2,914.44 / 2% = $145,722
