Retirement Planning Flashcards
Canadian Pension Plan Basics
- everyone over age of 18 in Canada pays into it
- 5.95% Employees / Employer portion
-Stops no matter what at age 70
-Contributions are based on salary “pensionable earnings”
-Minimum level aka Yearly Basic Exemption (YBE) is frozen at $3,500
-The yearly maximum pensionable earnings (YMPE) is adjusted each Jan based on increases of average wage
CPP CONTRIBUTION RATES:
2023: YMPE: $66,600, YBE: $3,500
SO Pensionable Earnings = (66,600-3,500) = $63,100
Employee contribution = 5.95% x $63,100 = $3,754.45
Employer contribution = 5.95% x $63,100 = $3,754.45
CPP Plan Benefits
- Disability benefits
- Retirement pension
- Survivor Benefits - death benefit ($2,500)
- Post-Retirement Benefit
CPP as early as age 60 and as late as age 70
-Reduced by 0.6%/mo (max 7.2%/year) if started before age 65
-Increased by 0.7% per month after age 65 (max 8.4% per year)
-Retroactive payments only up to 12 months
What keeps a record of your CPP earnings and contributions over the years?
Pension Credits
CPP sharing example:
Pat and Jean have been living together in a common-law relationship since 1979. They are both over 60 and both receive a CPP retirement pension.Jean’s monthly retirement pension is $400. Of that, $100 is based on income earned before moving in with Pat; this amount will not be affected by a pension-sharing arrangement. The other $300 is based on income earned during their relationship.
Pat was not working before this relationship. Pat’s monthly retirement pension of $550 is based entirely on income earned while living with Jean.Their pension payments, added together, total $950.
After subtracting the portion of Jean’s pension that is based on income earned before moving in with Pat ($100), their “shareable” pension amount is $850. With pension sharing, they would each receive half of $850, or $425. In addition to the $425, Jean would also receive the $100 that is based on earnings prior to this relationship with Pat. Jean’s total monthly CPP payment would be $525, while Pat’s would be $425.
Their T4 slips will show the amount each received during the previous year and will be used when calculating their income tax.
What are your three options with leaving an employer pension after it’s been vested for 2 years (min req)
- Take a deferred pension
- take pension funds to another pension plan (if new employer agrees)
- transfer funds to a LIRA
What is commuted value?
lump sum present value of your expected future pension plus benefits
What are your 3 retirement fund options?
- a LIF
- LIRA fund
- use funds to purchase an annuity
What are IPPS?
-IPPs offer best savings solution for ppl over 40 earning more than $100K / yr
-creditor proofing
-higher cont. limits
-guarantee an income at retirement (cannot be collapsed unless critical sitch prior)
- ALL IPP conts, fees etc made by a corp on behalf of key person, fully tax deductable to corp and non-tax benefit to employee
DPSP - deferred sharing profit plans
- are not locked in
- offer employers flexibility
-do not increase payroll taxes
-tax deductible for employers
What is the 3 Year Attribution Rule for RRSPs?
-if your spouse withdraws funds from their spousal RRSP within 3 calendar years of the other spouses SPL contribution, the withdrawal is treated as income on the contributing spouses tax return
-If after 3 years vested the withdrawal is considered income on the receiving spouses tax return
3 year rule does apply if:
-marriage breakdown
-death
-either spouse becomes non-resident
-money transferred to an annuity
RRSP deduction limit calculated by?
18% of “earned income” for preceding year LESS “pension adjustments” (RPP) LESS “past service pension adjustments” PLUS any “” reversals, Plus previous unused room
2023 max: $30,780
Withholding tax rates for RRSPs
- $0-5000 = 10%
- $5001-15000 = 20%
- > $15000 = 30%
What is a Pension Adjustment?
(PA) is an individual’s total pension credits for the year with a specific employer.
What does Pension Adjustment reduce?
An individuals PA in a year reduces the maximum amount that they can deduct for RRSP contributions the next year
- PA = total pension credits
- PA is ONLY used for DBP - PA = {(9 x benefit earned) - $600}
Formulas for Pension Adjustments (there’s 2)
For DBP: PA = {(9 x benefit earned) - $600}
For DCP: PA = Employer + Employee Contributions
*There is no negative PA, if negative number exists the answer is nil
What is Alternative Minimum Tax
It prevents high income earners and trusts from paying little or no tax as a result of certain tax incentives, including claiming certain tax deductions and earning Canadian dividends and capital gains
What type of retiring allowance does not qualify?
Unused vacation days do no qualify as a retiring allowance
- termination pay and unused sick leave credits do
Two benefits of RRIFs
- growth of investments beyond age 71
- deferral of tax on income earned until money is withdrawn
- no maximum withdrawal limits
- once converted to RRIF user will have until Dec 31 of following year to make first withdrawal (no min in first year RRIF made but minimum amounts every year following)
What is the RRIF “prescribed factor”? (qualifying RRIF / 1993)
- RRIF minimum calculation
PF = 1/(90-age) with age being age of person Jan 1 of the year.
Eg: Marc 1, 2022 Donna turned 70. She converted her RRSP two years ago (2022)
Starting in 2015 all RRIFs use, which RRIF Factor? (non-qualifying RRIF 2015)
- “new factors” (chart of ascending rates) AKA non -qualifying RRIF
What type of RRIFs (qualifying or non-qualifying) can use the spouse or common law partners for calculating the prescribed factor?
BOTH - qualifying and nonQ can use the spouses age
- it can give a lower minimum withdrawal amount using the younger persons age
What is a LIF Life Income Fund?
-Essentially a RRIF but with a minimum AND maximum withdrawal amount
-min by income tax act and max based by province
-income stream until age 80, then converted to annuity in BC
-LIF and LRIF are almost same thing except at age 80 a LIF turns into an annuity, LRIF does not
What is a LRIF?
-Locked - In Retirement Income Fund
-Holds locked in pension money
- more flexible than LIF
-no maturity dates
What is a LIRA? Essentially a locked in RRSP…
Locked In Retirement Account
-designed to accumulate retirement savings
- like an RRSP but money is locked in
-designed to accumulate retirement savings
Deferred Profit Sharing Plan (DPSP) Tax facts:
-Employers conts are non taxable benefits
-income/growth tax sheltered in plan
-benefits and payments taxable to recipient
GIS exemption for working individuals
- $5,000 exempt no matter what and then 50% of the next $10,000 max
Eg: $18K income, $5K exempt… $13K left… but only $10K of $13K eligable.
$5K = (10,000 x .5) = $10,000 total exempt
Say income was $12K for year: $5K (7000 x .50) = $8,500 exempt
(12K - 5K = 7K…7K x 50%)
Canada Child Benefit (CCB)
- monthly, non-taxable benefit
Amount received is based on childrens age and number you have plus your adjusted family net income from previous year
-its simple
-tax free
-generous
-targeted to those who need it most
Child Disability Tax Credit (CDB)
- ## $236/mo
Employment Insurance Benefits (EI)
- if you lose a job you collect regular benefits
- maternity leave is parental benefits
- illness is sickness benefits
- compassionate care benefits for children - for those with ill family member 35 weeks (under age 18)
- fishing benefits - those who cannot fish at a time
- family care - 15 weeks over age 18
What is an EFA?
Eligible Funeral Arrangement
-funds someones funeral services
What is an RCA?
-Retirement compensation arrangement allows an employer makes contributions to a person aka custodian
Refundable Tax:
-contributions from employer to custodian are taxable
Distributions:
- all RCA dis are taxable
Refundable Tax
Pooled Registered Pension Plans (PRPPs)
-Operates like a DCP except it allows assets from multiple employers to be pooled
-low cost option
-more people can benefit
-portable
-need to report pension adjustment
What is YMPE?
Maximum salary amount you can calculate CPP contributions on
- is the the earnings ceiling for the calculation
What is YBE?
-CPPs yearly basic exemption amount. It is always $3,500
CPP Contribution Formula =
CPP contribution = (YMPE - YBE) x CPP Rate
= ($66,600 (2023 amount) - $3,500 (always this amount)) x 5.25 cpp rate
Who pays CPP?
50% Employer (5.25%) and 50% Employee (5.25%)
IF SELF EMPLOYED YOU PAY BOTH - look for clues like
-“net of expenses they earned”
-“self-employed”
RPP Calculations
Benefit amount (could be an average of years or given) x years in Defined Benefit Program
How to calculate Earlies Retirement Age with Unreduced Pension Benefit
Age = (Age when employee joined plan + qualifying factor) / 2
= earliest age for unreduced early retirement benefit
Contributions to a Defined Contribution Plan are…
- Employers cont are tax-deductible and are not a taxable benefit to plan member
- Employee conts are tax-deductible the year they are made
Calculation for a Defined Benefit Pension Plan (DBP)
PA = {(9 x benefit earned) - $600}
Calculation for a Defined Contribution Pension Plan (DCP)
PA = Employer = Employee Contributions
PA (pension adjustment) and PSPAs (past service PA) do what?
Reduce the amount a member can contribute to their RRSP in current year
2023 RRSP Cont Limit Worksheet:
- 2023 RRSP $ Limit: $30,780 2.
Calculate 18% of earned income for the previous year: - Use the lower of 1 or 2
- Less any Pension Adjustment (PA) for the previous year
- Less any Past Service Pension Adjustment (PSPA) for the current year
- Add any pension adjustment reversal (PAR) for the current year.
- Equals current year’s RRSP contribution limit
- Add any unused RRSP contribution room from all previous years
- Equals total RRSP contribution limit
- Add $2,000 life time allowable over contribution11. Equals Maximum allowable contribution
QUESTION: Calculate DBP Pension Adjustment
Judy, a member of her company’s DBPP, is entitled to a flat pension benefit equal to $25 per month for each complete year worked. Calculate her pension adjustment based on this information.
First calculate the benefit earned:
12 months × $25 = $300
Second calculate the PA:
PA = (9 × $300) – $600 = $2,100
CLUES: If you need a Pension adjustment there are two formulas, one for DPB and one for DCP. DCP is easy, just add employee and employer… DBP is the weird formula with 9 and $600…
When asked about solving Pension Plan and PA questions what should you closely look for?
- is it a DCP or DBP?
-how many years in service
-have they reached the employment length requirements to be eligible for plan
-how many years have they been IN the plan - what year are they asking you to solve the PA? Remember the PA is always from the year PRIOR (previous years earnings)… if they are asking for 2021 PA, use 2020 salary.. make sense :)
Calculate MAXIMUM Amount someone can cont. for RRSP in given year
QUESTION:
Todd is an IT Specialist who belongs to a registered pension plan offered by his employer. His earned income for 2019 was $52,000, for 2020 was $55,000, and in 2021 is estimated to be $59,000. His pension adjustments reported on his 2019 and 2020 T4 slips, were respectively, $2,500 and $2,850. Ignoring any unused contributions or overcontributions permitted, calculate the maximum amount Todd can contribute to his personal RRSP for a deduction on his 2021 tax return.
RRSP Contribution Room:
Current contribution limit, which is the lower of, 18% previous year’s earned income or the dollar limit ($27,830 for 2021).
+ Current year’s PAR
– Previous year’s PA
– Current year’s PSPA
= Contribution Room
+ Carry forwards
= Total RRSP Contribution Room
In this case:18% x earned income from 2020; max of $27,830
18% x $55,000 = $9,900
– Previous year’s PA – $2,850
Contribution Room = $7,050
What’s one way to lower your RRIF payments?
- use your younger spouses age
How is a Pension Benefit Income calculated?
PB = Benefit % x Years of Service x Earnings
PB is taxable income
What is the contribution limit for a DPSP?
The lessor of 18% income or 1/2 the dollar limit (roughly $16K)
CHOOSE THE LOWER OPTION
How long do you have with an RRSP turned into a RRIF at age 71 to make your first withdrawal?
- until year end of 71 year, start withdrawing in your 72
By age 95 what percentage of funds must be drawn from your RRIF?
20%
How much of your RPP can you rollover to your RRSP?
$2000 for each year or part year of service before 1996
If you are doing a cash flow statement make SURE you use AFTER TAX DOLLARS
Multiply by the tax rate and THEN remove expenses!
What are some things to consider with refinancing your mortgage?
- Would you pass the new stress test rules, this is required to RE FINANCE TOO ?
- Qualification rate: spend max of 32% gross income on housing and 42% total loan values
- Credit score: minimum 680
- Down payment required: you need to fund DP with your own funds, anything under 20% requires default insurance purchased as well and you cannot buy a house over $1M with default insurance requirements
