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CFP Canada Oct 2022 > Retirement Planning > Flashcards

Retirement Planning Flashcards

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1
Q

What are the 5 steps of the retirement planning process?

A
  1. Retirement objectives.
  2. Current financial status.
  3. Retirement income source and needs.
  4. Establish plan.
  5. Monitor/review plan.
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2
Q

What is eligible pension income (think age limit)?

A
  1. Under 65:
    - Payments received from registered plans in form of life annuity.
    - Annuity payments from registered plans due to spouse’s death.
  2. Over 65: annuity payments from RPP, RSP, RIF, DPSP.
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3
Q

Who contributes to Canada Pension Plan (CPP)?

A
  1. All Canadians and self-employed workers between 18-65 who earn more than than year’s basic exemption (YBE).
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4
Q

What is the rate that EEs/ERs or self-employed contribute to CPP?

A
  1. 5.70% for EEs and ERs, totalling 11.40% %.
  2. Self-employed must contribute ER portion, thus 11.40%.
    Note: these are 2022 figures.
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5
Q

What are the incentives/penalties for delaying or taking CCP early?

A
  1. Before 65, pension reduced 0.6% each month (after 60).
  2. After 65, pension increased 0.7% each month (up to 70)
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6
Q

What is the CPP Post Retirement Benefit?

A
  1. Benefit paid to people retired, but who continue to work and make CPP con’t while already receiving CPP.
  2. Note: must still contribute if between 60-65 and working.
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7
Q

How are the CPP benefit payments calculated?

A
  1. Amount is approx. 25% of contributor’s monthly pensionable earnings during years they contributed to plan.
  2. e.g. Max benefit for 65 y/o = [(avg. YMPE over last 5 years) / 12] x 25%
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8
Q

What’s the Drop Out provision in CPP?

A
  1. Allows you to exclude lowest 17% of lifetime earnings (e.g. at 65, you can drop 8 years from CPP calculation).
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9
Q

What makes a contributor eligible for disability CPP pension?

A
  1. Considered disabled according to CPP (not DTC).
  2. Unable to perform ANY job.
  3. Con’t to CPP in 4 of last 6 years.
  4. Provide medical evidence.
  5. Under 65.
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10
Q

When does the disability pension start and end?

A
  1. Starts four months after the month they became disabled.
  2. Ends when they reach 65, converts to retirement pension.
  3. Note: disability pension is higher than retirement one.
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11
Q

What happens to contributor’s CPP at death?

A
  1. Death benefit can be paid to surviving spouse, up to 6x the actual retirement pension (max $2,500).
  2. The surviving spouse can receive up to 60% of the deceased’s benefits.
  3. There is also a child’s benefit, assuming child is under 18 or 18-25, but in school.
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12
Q

How does CPP sharing work for spouses?

A
  1. Based on amount of time couple lived together and their contributory period.
  2. Both spouses must be at least 60.
  3. Only one spouse needs to have CPP to share.
  4. Pension is split evenly 50/50.
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13
Q

How do you qualify for Old Age Security (OAS)?

A
  1. Be a Canadian citizen or legal resident.
  2. If no longer living in Canada, must have been a Canadian citizen or legal resident day before leaving.
  3. Min. 10 years of residence after reaching age 18.
  4. Min. 20 years of residence after 18 to receive pension outside Canada.
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14
Q

How do you qualify for the full OAS pension?

A
  1. Resided in Canada for 40 years after age 18; AND
  2. Resided in Canada for the 10 years before applying for pension.
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15
Q

How do you qualify for the partial OAS pension?

A
  1. Earned at rate of 1/40th of full monthly pension for each year lived in Canada after age 18.
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16
Q

What is the OAS clawback?

A
  1. 15% clawed back for each dollar earned above threshold ($79,845 for 2021 tax year).
  2. Full clawback once year exceeds $129,757.
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17
Q

What are the incentive for delaying OAS?

A
  1. Amount increases by 0.6% per month delayed up to age 70.
  2. Note: not eligible for GIS if they delay.
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18
Q

What are the eligibility requirements for Guaranteed Income Supplement (GIS)?

A
  1. Seniors receiving full/partial OAS.
  2. Must be 65 years of age.
  3. Must be Canadian resident.
  4. Meet low-income threshold.
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19
Q

How is the GIS clawback calculated?

A
  1. Reduced by 50 cents for each $1 earned.
  2. First $3,500 is exempt from GIS clawback.
  3. Once income cut-off is reached, they do not receive GIS.
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20
Q

What are the 3 things Defined Contribution (DC) pensions are based on?

A
  1. How much the EE and ER contribute.
  2. Earnings on those contributions.
  3. How good a pension those earnings will buy in retirement.
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21
Q

What is true about contributions to a DC plan?

A
  1. EE contributions are known, final benefit is unknown.
  2. Doesn’t promise to pay you a specific amount in retirement.
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22
Q

What are 4 advantages of a DC plan?

A
  1. Less rigorous regulations.
  2. EE make investment choices.
  3. Easy to understand/administer.
  4. ER responsibility limited.
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23
Q

What are 3 disadvantages of a DC plan?

A
  1. Final pension amount is unknown until retirement.
  2. Final pension might be different than expected.
  3. Similar EE circumstances may receive substantially different pensions.
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24
Q

What are the contribution limits for a DC plan?

A
  1. 18% of EE’s compensation for the year; or
  2. Limit set by government for year.
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25
Q

What are DC plans also referred to as?

A
  1. Money purchase plan.
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26
Q

What is the pension adjustment formula for DB plans?

A
  1. (9 x annual accrued benefit) - 600.
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27
Q

What is a Pension Adjustment (PA)?

A
  1. EE and ER total contributions to RPP. This amount reduces RRSP contribution year.
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28
Q

What is true about DB plans and contributions?

A
  1. Pension benefit is known.
  2. Contributions required to fund benefit is unknown.
  3. EE con’t limited to lesser of 9% of compensation that year or $1000 + 70% of EE’s PA for the year.
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29
Q

What are the 3 types of DB plans?

A
  1. Flat benefit.
  2. Career average.
  3. Final or best average.
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30
Q

What is the Flat benefit of a DB plan and what are pros/cons?

A
  1. Simplest; monthly pension is fixed $ amount based on years of service.
  2. Pros: easy to understand, funded by ER, addition to OAS/CPP.
  3. Cons: doesn’t differentiate earning levels of EEs or account for inflation.
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31
Q

What is the Career Average benefit of a DB plan and what are pros/cons?

A
  1. Calculated as % of EE earnings over entire period in plan.
  2. Pros: easy to integrate with CPP benefits, gives equal weighting to EE earnings over career, ER improves benefit by updating base year in pension formula.
  3. Cons: Eroded by inflation if base year isn’t updated regularly.
32
Q

What is the Final or Best Average benefit of a DB plan and what are pros/cons?

A
  1. Like Career Average, but based on shorter period of time (typically best 5 earning years or years towards end of career).
  2. Pros: easy to integrate with CPP benefits, protects against inflation
  3. Cons: if earnings decrease in final years, may result in lower benefits.
33
Q

What are the 4 types of DB options at retirement?

A
  1. Life income.
  2. Life income with guarantee period.
  3. Joint and survivor pension.
  4. Joint and survivor pension with guarantee period.
    - Joint w/ survivorship: provide 50-100% to surviving spouse.
    - Guarantee period: choose period that payments are made beyond your death (longer period, lower annual income).
34
Q

What is a Bridge Benefit?

A
  1. Benefit paid to workers retiring before 65 to increase income until they start receiving OAS/CPP.
  2. Decreases pension later due to increased payments up front.
35
Q

What’s the earliest most pensions allow people to start benefits?

A
  1. Typically, 55 years old.
36
Q

What 4 options do plan members have when terminated?

A
  1. Lump sum payment (if not locked-in).
  2. Transfer value to another RPP.
  3. Deferred life annuity - starting at retirement.
  4. Lump sum transfer to LIF.
37
Q

What is a Pooled Registered Pension Plan (PRPP)? Pros/cons?

A
  1. New kind of DC plan for EE and SE who don’t have option to participate in pension plan at their work.
  2. Pros: lower admin costs, investment alternatives, portable.
  3. Cons: substantial regulation, isn’t mandatory by ER.
38
Q

What is a Pension Buyback?

A
  1. Buying past service by paying a fixed amount (for years of pensionable service missed) to increase retirement pension.
  2. Note: only applicable for DB plans.
39
Q

What are 3 reasons (each) to and not to pursue a pension buyback?

A
  1. To buy:
    - Income for life.
    - Delegate investment decisions to pension fund.
    - Access to group insurance.
  2. Not to buy:
    - Survivor benefits: spouse could be left with reduced pension.
    - Diversification: income all coming from one provider.
    - Estate flexibility: DB plan can only leave assets to spouse.
40
Q

What is a Pension Commutation?

A
  1. A change from receiving monthly installments for the rest of your life to receiving your pension money all at once.
41
Q

Generally, when does it make sense to take the pension commutation?

A
  1. When the lump sum value you receive is greater than the lifetime annuity payment discounted to today.
42
Q

What is a Target Benefit Plan (TBP)?

A
  1. A RPP that combines a DB approach to providing benefits with a DC approach to funding those benefits.
  2. Goal is to maintain a stable formula with predictable benefits.
43
Q

What is a LIRA and its rules?

A
  1. A plan for EE who have vested benefits in ER RPP and leaves.
  2. Rules:
    - No contributions.
    - No withdrawals unless specific emergency (separate question).
    - Only funds from pension can be invested in them.
    - Cannot mature before 55 years of age.
44
Q

Under what 5 exceptions can you withdraw from a LIRA?

A
  1. Financial hardship.
  2. Shortened life expectancy.
  3. Small balance.
  4. Spousal/child maintenance orders.
  5. No longer Canadian resident.
45
Q

What are 3 differences between a LIF and RIF?

A
  1. RIF:
    - Funds from RRSP, another RIF (not locked-in).
    - No minimum age requirement.
    - No max amount that can be withdrawn each year.
    -
  2. LIF:
    - Funds from LIRA, locked-in funds, another LIF.
    - To establish LIF, some provinces have min. age of 55.
    - There is a stipulated max. that can be withdrawn each year.
46
Q

What is one common feature between a LIF and RIF?

A
  1. Any amount above the min. is subject to withholding tax.
47
Q

What are 5 unique features about a LIF?

A
  1. Has a max withdrawal limit.
  2. One-time opportunity to transfer 50% of value to RIF.
  3. Creditor protected.
  4. No withdrawals before 55.
  5. Can transfer withdrawals to RSP/RIF if under 71 and doesn’t impact RSP con’t room.
48
Q

What are 9 things considered earned income (and increase income)?

A
  1. Salaries/wages, including bonuses.
  2. Commissions.
  3. Allocations from EE profit-sharing plans.
  4. Net business/SE income.
  5. Net rental income.
  6. Taxable spousal support received.
  7. Royalties.
  8. Disability payments under CPP.
  9. Research grants.
49
Q

What are 4 things that reduce earned income?

A
  1. Deductible spousal/child support payments.
  2. Most deductible EE expenses (e.g. union dues, travelling).
  3. Rental losses.
  4. Small business losses.
50
Q

When does your initial RSP contribution room become available?

A
  1. Jan 1 of the year after you first have earned income.
51
Q

What is the contribution room calculation for RRSPs?

A
  1. Current con’t limit - PA (prior year) + PAR (this year) - Net PSPA (this year) + carry forward of unused deduction (prior year).
52
Q

Describe some parameters about contribution room (e.g. limit, penalties).

A
  1. Contribution limit is lesser of $29,210 (2021) or 18% of earned income.
  2. Unused room can be carried forward indefinitely.
  3. Can over-contribute lifetime $2,000. 1%/month fee for anything over.
53
Q

What are the RRSP withdrawal withholding tax rates?

A
  1. $0 - $5,000 = 10%.
  2. $5,001 - $15,000 = 20%.
  3. $15,000+ = 30%.
54
Q

What are 3 non-resident implications for RRSPs?

A
  1. If you leave Canada, you can keep your RRSP, but no contributions.
  2. Can withdraw lump sum, 25% withheld. Periodic withdrawals, 15% withheld.
  3. Withdrawals count as worldwide income (foreign tax credit for US).
55
Q

What are 3 examples of a qualified beneficiary for RRSPs?

A
  1. Legal spouse / common-law.
  2. Minor child / grandchild.
  3. Disabled child (can be adult).
56
Q

When to use TFSA vs. RRSP?

A
  1. TFSA is better for low-income households, while RRSP is better for high earning taxpayers.
  2. RRSP when income is expected to be higher in contribution years and lower after retirement.
  3. TFSA when income tax is expected to be lower in contribution years and higher after retirement.
57
Q

What creditor protection is available to RSPs?

A
  1. RSPs no longer can be seized by creditors.
  2. Contributions in past 12 months are not creditor proof.
  3. At death, if bene is estate, a creditor can make a claim. Not the case is bene is a person.
58
Q

What are the attribution rules for Spousal RRSP withdrawals?

A
  1. Withdrawals taxable to contributor if withdrawal is made:
    - In year of or two calendars years after contribution.
    - E.g. total 3 years waiting period on funds.
    - Best to make contributions in Dec, not in first 60 days.
59
Q

What are 4 benefits for using a Spousal RRSP?

A
  1. Income splitting before 65 (since cannot split RIF before 65).
  2. Make RRSP con’t past age 71 if spouse is under 71.
  3. Use of HBP or LLP.
  4. Planned leaves of absence, low income years.
60
Q

How is the RIF minimum withdrawal calculated?

A
  1. Prior to 79 = [1 / (90 - age)] x 100
  2. Older than 79 = CRA age factor
61
Q

What is a Refund of Premiums?

A
  1. The payment on death of an annuitant to a qualified beneficiary for an RRSP.
62
Q

What’s the difference between a successor annuitant and beneficiary?

A
  1. SA: spouse takes over the account upon death without needing to transfer account.
  2. Bene: the assets are transferred to the bene and the account is closed.
63
Q

What’s the rule for non-residents taking payments from RRIF?

A
  1. Withholding tax of 25%, even if it’s the minimum payment.
  2. For where there’s a tax treaty (e.g. US), 15%.
64
Q

What is an Individual Pension Plan (IPP)?

A
  1. Form of DB plan.
  2. Provide greater benefits and higher con’t limits than RRSP.
  3. Set up for one person, typically, the owner-manager.
65
Q

What are the 2 types of IPPs?

A
  1. Connected: for owner-managers who own > 10% of shares who don’t deal at arm’s length with plan sponsor.
  2. Non-connected: for person who is not a shareholder or owns less than 10% of shares. Used to retain senior management.
66
Q

When does it make sense to use an IPP (eligibility as well)?

A
  1. Executive is older than 40, usually older than 45.
  2. Earns more than 100k.
  3. Income is stable.
67
Q

What are 2 advantages for Supplemental Executive Retirement Plans (SERP)?

A
  1. For ER: retain and attract top execs and key EEs.
  2. For EE: help fund a retirement plan that reflects their high salary.
68
Q

Provide 3 pros and 2 cons of a Retirement Compensation Arrangement (RCA).

A
  1. Pros:
    - No specified contribution or withdrawal limits.
    - Doesn’t affect RPP/RRSP contribution limits.
    - Immediate tax deduction for ER.
  2. Cons:
    - 50% of money in RCA (invested in RTA) do not earn interest.
    - Costly to administer/maintain.
69
Q

What are 4 pros/cons of a Deferred Profit-Sharing Plan (DPSP)?

A
  1. Pros:
    - Easy to administer.
    - Contributions are tax deductible to ER.
    - ER doesn’t have to contribute if they can’t.
    - Entirely funded by ER.
  2. Cons:
    - EE contributions aren’t allowed.
    - Can be cancelled by ER at any time.
    - ER contributions are unpredictable.
    - Benefit not guaranteed.
70
Q

What are 4 pros and cons of taking the commuted value of a pension?

A
  1. Pros:
    - Remaining balance can be transferred (tax-deferred) to surviving spouse on death.
    - Can unlock up to 50% of pension.
    - Removes uncertainty of pension going under in the future.
    - Can invest proceeds to potentially receive greater returns.
  2. Cons:
    - Any amount greater than Max Transfer Value is taxable.
    - Investor assumes investment risk.
    - Depending on investment performance, could result in reduced benefits.
    - Gives up full indexations of pension benefit.
71
Q

What is the difference between naming a spouse as designated beneficiary or successor holder/annuitant?

A
  1. A beneficiary inherits the assets in your account without inheriting the account itself. A successor takes ownership of your account and all of the assets in your account.
72
Q

What is true of commuted values of pensions and interest rates?

A
  1. They are negatively correlated. A low interest rate can result in a higher commuted value of your pension.
73
Q

What are 7 criteria for deciding between taking a pension or commuted value?

A
  1. Tax repercussions.
  2. Plan solvency.
  3. Total income and assets needs.
  4. Investor profile.
  5. Flexibility.
  6. Survival (life expectancy).
  7. Benefits related to pension.
74
Q

List 2 advantages and disadvantages of an IPP.

A
  1. Pros:
    - Contribution rates are higher for IPPs than RSP limits, higher tax savings.
    - Provides guaranteed income level in retirement.
    - Employer responsible for shortfall.
    - Benefits fully protected from creditors.
  2. Cons:
    - High costs, complex and lots of admin work.
    - Highly regulated, lots of filing.
    - Leaves minimal RSP contribution room as IPPs maximize tax-sheltered benefits.
75
Q

When a couple divorces, what period of time is used to determine how CPP credit is split?

A
  1. January of the year a couple cohabits in a conjugal relationship to December of the year before the year in which they live separately/apart and were divorced.
76
Q

What is the formula to determine the earliest age someone can retire without a reduced pension?

A
  1. (qualifying factor + age they joined pension) / 2

CFP Canada Oct 2022 (7 decks)

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