Retirement Planning Flashcards
What are the 5 steps of the retirement planning process?
- Retirement objectives.
- Current financial status.
- Retirement income source and needs.
- Establish plan.
- Monitor/review plan.
What is eligible pension income (think age limit)?
- Under 65:
- Payments received from registered plans in form of life annuity.
- Annuity payments from registered plans due to spouse’s death. - Over 65: annuity payments from RPP, RSP, RIF, DPSP.
Who contributes to Canada Pension Plan (CPP)?
- All Canadians and self-employed workers between 18-65 who earn more than than year’s basic exemption (YBE).
What is the rate that EEs/ERs or self-employed contribute to CPP?
- 5.70% for EEs and ERs, totalling 11.40% %.
- Self-employed must contribute ER portion, thus 11.40%.
Note: these are 2022 figures.
What are the incentives/penalties for delaying or taking CCP early?
- Before 65, pension reduced 0.6% each month (after 60).
- After 65, pension increased 0.7% each month (up to 70)
What is the CPP Post Retirement Benefit?
- Benefit paid to people retired, but who continue to work and make CPP con’t while already receiving CPP.
- Note: must still contribute if between 60-65 and working.
How are the CPP benefit payments calculated?
- Amount is approx. 25% of contributor’s monthly pensionable earnings during years they contributed to plan.
- e.g. Max benefit for 65 y/o = [(avg. YMPE over last 5 years) / 12] x 25%
What’s the Drop Out provision in CPP?
- Allows you to exclude lowest 17% of lifetime earnings (e.g. at 65, you can drop 8 years from CPP calculation).
What makes a contributor eligible for disability CPP pension?
- Considered disabled according to CPP (not DTC).
- Unable to perform ANY job.
- Con’t to CPP in 4 of last 6 years.
- Provide medical evidence.
- Under 65.
When does the disability pension start and end?
- Starts four months after the month they became disabled.
- Ends when they reach 65, converts to retirement pension.
- Note: disability pension is higher than retirement one.
What happens to contributor’s CPP at death?
- Death benefit can be paid to surviving spouse, up to 6x the actual retirement pension (max $2,500).
- The surviving spouse can receive up to 60% of the deceased’s benefits.
- There is also a child’s benefit, assuming child is under 18 or 18-25, but in school.
How does CPP sharing work for spouses?
- Based on amount of time couple lived together and their contributory period.
- Both spouses must be at least 60.
- Only one spouse needs to have CPP to share.
- Pension is split evenly 50/50.
How do you qualify for Old Age Security (OAS)?
- Be a Canadian citizen or legal resident.
- If no longer living in Canada, must have been a Canadian citizen or legal resident day before leaving.
- Min. 10 years of residence after reaching age 18.
- Min. 20 years of residence after 18 to receive pension outside Canada.
How do you qualify for the full OAS pension?
- Resided in Canada for 40 years after age 18; AND
- Resided in Canada for the 10 years before applying for pension.
How do you qualify for the partial OAS pension?
- Earned at rate of 1/40th of full monthly pension for each year lived in Canada after age 18.
What is the OAS clawback?
- 15% clawed back for each dollar earned above threshold ($79,845 for 2021 tax year).
- Full clawback once year exceeds $129,757.
What are the incentive for delaying OAS?
- Amount increases by 0.6% per month delayed up to age 70.
- Note: not eligible for GIS if they delay.
What are the eligibility requirements for Guaranteed Income Supplement (GIS)?
- Seniors receiving full/partial OAS.
- Must be 65 years of age.
- Must be Canadian resident.
- Meet low-income threshold.
How is the GIS clawback calculated?
- Reduced by 50 cents for each $1 earned.
- First $3,500 is exempt from GIS clawback.
- Once income cut-off is reached, they do not receive GIS.
What are the 3 things Defined Contribution (DC) pensions are based on?
- How much the EE and ER contribute.
- Earnings on those contributions.
- How good a pension those earnings will buy in retirement.
What is true about contributions to a DC plan?
- EE contributions are known, final benefit is unknown.
- Doesn’t promise to pay you a specific amount in retirement.
What are 4 advantages of a DC plan?
- Less rigorous regulations.
- EE make investment choices.
- Easy to understand/administer.
- ER responsibility limited.
What are 3 disadvantages of a DC plan?
- Final pension amount is unknown until retirement.
- Final pension might be different than expected.
- Similar EE circumstances may receive substantially different pensions.
What are the contribution limits for a DC plan?
- 18% of EE’s compensation for the year; or
- Limit set by government for year.
What are DC plans also referred to as?
- Money purchase plan.
What is the pension adjustment formula for DB plans?
- (9 x annual accrued benefit) - 600.
What is a Pension Adjustment (PA)?
- EE and ER total contributions to RPP. This amount reduces RRSP contribution year.
What is true about DB plans and contributions?
- Pension benefit is known.
- Contributions required to fund benefit is unknown.
- EE con’t limited to lesser of 9% of compensation that year or $1000 + 70% of EE’s PA for the year.
What are the 3 types of DB plans?
- Flat benefit.
- Career average.
- Final or best average.
What is the Flat benefit of a DB plan and what are pros/cons?
- Simplest; monthly pension is fixed $ amount based on years of service.
- Pros: easy to understand, funded by ER, addition to OAS/CPP.
- Cons: doesn’t differentiate earning levels of EEs or account for inflation.
What is the Career Average benefit of a DB plan and what are pros/cons?
- Calculated as % of EE earnings over entire period in plan.
- 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.
- Cons: Eroded by inflation if base year isn’t updated regularly.
What is the Final or Best Average benefit of a DB plan and what are pros/cons?
- Like Career Average, but based on shorter period of time (typically best 5 earning years or years towards end of career).
- Pros: easy to integrate with CPP benefits, protects against inflation
- Cons: if earnings decrease in final years, may result in lower benefits.
What are the 4 types of DB options at retirement?
- Life income.
- Life income with guarantee period.
- Joint and survivor pension.
- 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).
What is a Bridge Benefit?
- Benefit paid to workers retiring before 65 to increase income until they start receiving OAS/CPP.
- Decreases pension later due to increased payments up front.
What’s the earliest most pensions allow people to start benefits?
- Typically, 55 years old.
What 4 options do plan members have when terminated?
- Lump sum payment (if not locked-in).
- Transfer value to another RPP.
- Deferred life annuity - starting at retirement.
- Lump sum transfer to LIF.
What is a Pooled Registered Pension Plan (PRPP)? Pros/cons?
- New kind of DC plan for EE and SE who don’t have option to participate in pension plan at their work.
- Pros: lower admin costs, investment alternatives, portable.
- Cons: substantial regulation, isn’t mandatory by ER.
What is a Pension Buyback?
- Buying past service by paying a fixed amount (for years of pensionable service missed) to increase retirement pension.
- Note: only applicable for DB plans.
What are 3 reasons (each) to and not to pursue a pension buyback?
- To buy:
- Income for life.
- Delegate investment decisions to pension fund.
- Access to group insurance. - 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.
What is a Pension Commutation?
- A change from receiving monthly installments for the rest of your life to receiving your pension money all at once.
Generally, when does it make sense to take the pension commutation?
- When the lump sum value you receive is greater than the lifetime annuity payment discounted to today.
What is a Target Benefit Plan (TBP)?
- A RPP that combines a DB approach to providing benefits with a DC approach to funding those benefits.
- Goal is to maintain a stable formula with predictable benefits.
What is a LIRA and its rules?
- A plan for EE who have vested benefits in ER RPP and leaves.
- 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.
Under what 5 exceptions can you withdraw from a LIRA?
- Financial hardship.
- Shortened life expectancy.
- Small balance.
- Spousal/child maintenance orders.
- No longer Canadian resident.
What are 3 differences between a LIF and RIF?
- RIF:
- Funds from RRSP, another RIF (not locked-in).
- No minimum age requirement.
- No max amount that can be withdrawn each year.
- - 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.
What is one common feature between a LIF and RIF?
- Any amount above the min. is subject to withholding tax.
What are 5 unique features about a LIF?
- Has a max withdrawal limit.
- One-time opportunity to transfer 50% of value to RIF.
- Creditor protected.
- No withdrawals before 55.
- Can transfer withdrawals to RSP/RIF if under 71 and doesn’t impact RSP con’t room.
What are 9 things considered earned income (and increase income)?
- Salaries/wages, including bonuses.
- Commissions.
- Allocations from EE profit-sharing plans.
- Net business/SE income.
- Net rental income.
- Taxable spousal support received.
- Royalties.
- Disability payments under CPP.
- Research grants.
What are 4 things that reduce earned income?
- Deductible spousal/child support payments.
- Most deductible EE expenses (e.g. union dues, travelling).
- Rental losses.
- Small business losses.
When does your initial RSP contribution room become available?
- Jan 1 of the year after you first have earned income.
What is the contribution room calculation for RRSPs?
- Current con’t limit - PA (prior year) + PAR (this year) - Net PSPA (this year) + carry forward of unused deduction (prior year).
Describe some parameters about contribution room (e.g. limit, penalties).
- Contribution limit is lesser of $29,210 (2021) or 18% of earned income.
- Unused room can be carried forward indefinitely.
- Can over-contribute lifetime $2,000. 1%/month fee for anything over.
What are the RRSP withdrawal withholding tax rates?
- $0 - $5,000 = 10%.
- $5,001 - $15,000 = 20%.
- $15,000+ = 30%.
What are 3 non-resident implications for RRSPs?
- If you leave Canada, you can keep your RRSP, but no contributions.
- Can withdraw lump sum, 25% withheld. Periodic withdrawals, 15% withheld.
- Withdrawals count as worldwide income (foreign tax credit for US).
What are 3 examples of a qualified beneficiary for RRSPs?
- Legal spouse / common-law.
- Minor child / grandchild.
- Disabled child (can be adult).
When to use TFSA vs. RRSP?
- TFSA is better for low-income households, while RRSP is better for high earning taxpayers.
- RRSP when income is expected to be higher in contribution years and lower after retirement.
- TFSA when income tax is expected to be lower in contribution years and higher after retirement.
What creditor protection is available to RSPs?
- RSPs no longer can be seized by creditors.
- Contributions in past 12 months are not creditor proof.
- At death, if bene is estate, a creditor can make a claim. Not the case is bene is a person.
What are the attribution rules for Spousal RRSP withdrawals?
- 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.
What are 4 benefits for using a Spousal RRSP?
- Income splitting before 65 (since cannot split RIF before 65).
- Make RRSP con’t past age 71 if spouse is under 71.
- Use of HBP or LLP.
- Planned leaves of absence, low income years.
How is the RIF minimum withdrawal calculated?
- Prior to 79 = [1 / (90 - age)] x 100
- Older than 79 = CRA age factor
What is a Refund of Premiums?
- The payment on death of an annuitant to a qualified beneficiary for an RRSP.
What’s the difference between a successor annuitant and beneficiary?
- SA: spouse takes over the account upon death without needing to transfer account.
- Bene: the assets are transferred to the bene and the account is closed.
What’s the rule for non-residents taking payments from RRIF?
- Withholding tax of 25%, even if it’s the minimum payment.
- For where there’s a tax treaty (e.g. US), 15%.
What is an Individual Pension Plan (IPP)?
- Form of DB plan.
- Provide greater benefits and higher con’t limits than RRSP.
- Set up for one person, typically, the owner-manager.
What are the 2 types of IPPs?
- Connected: for owner-managers who own > 10% of shares who don’t deal at arm’s length with plan sponsor.
- Non-connected: for person who is not a shareholder or owns less than 10% of shares. Used to retain senior management.
When does it make sense to use an IPP (eligibility as well)?
- Executive is older than 40, usually older than 45.
- Earns more than 100k.
- Income is stable.
What are 2 advantages for Supplemental Executive Retirement Plans (SERP)?
- For ER: retain and attract top execs and key EEs.
- For EE: help fund a retirement plan that reflects their high salary.
Provide 3 pros and 2 cons of a Retirement Compensation Arrangement (RCA).
- Pros:
- No specified contribution or withdrawal limits.
- Doesn’t affect RPP/RRSP contribution limits.
- Immediate tax deduction for ER. - Cons:
- 50% of money in RCA (invested in RTA) do not earn interest.
- Costly to administer/maintain.
What are 4 pros/cons of a Deferred Profit-Sharing Plan (DPSP)?
- Pros:
- Easy to administer.
- Contributions are tax deductible to ER.
- ER doesn’t have to contribute if they can’t.
- Entirely funded by ER. - Cons:
- EE contributions aren’t allowed.
- Can be cancelled by ER at any time.
- ER contributions are unpredictable.
- Benefit not guaranteed.
What are 4 pros and cons of taking the commuted value of a pension?
- 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. - 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.
What is the difference between naming a spouse as designated beneficiary or successor holder/annuitant?
- 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.
What is true of commuted values of pensions and interest rates?
- They are negatively correlated. A low interest rate can result in a higher commuted value of your pension.
What are 7 criteria for deciding between taking a pension or commuted value?
- Tax repercussions.
- Plan solvency.
- Total income and assets needs.
- Investor profile.
- Flexibility.
- Survival (life expectancy).
- Benefits related to pension.
List 2 advantages and disadvantages of an IPP.
- 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. - 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.
When a couple divorces, what period of time is used to determine how CPP credit is split?
- 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.
What is the formula to determine the earliest age someone can retire without a reduced pension?
- (qualifying factor + age they joined pension) / 2
