Retirement Planning: Government & Employer Plans

Unit 9: Retirement

• Government and Employer Plans
• Registered Retirement Savings Plans
• Withdrawing from RRSPs
• Locked-In Accounts

Old Age Security Program

• Funded through general tax revenues.
• There is no contribution requirement.
• Individuals must meet age and residency criteria to be eligible.
• Benefits include:
  • Old Age Security Pension
  • Guaranteed Income Supplement
  • Allowance
  • Allowance for Survivor

Old Age Security Pension

• Old Age Security Pension provides a monthly pension to individuals 65 years or older.
• Guaranteed Income Supplement is a benefit to OAS qualified low-income pensioners, and is means-tested.
• An allowance benefits low-income seniors between 60 and 64, and their spouse must be eligible for OAS and GIS.
• Allowance for Survivor benefits low-income widowed seniors between 60 and 64 who have not remarried or entered a common-law relationship.

Canada Pension Plan (CPP) / Québec Pension Plan (QPP)

• Pensioners must have contributed to the program to be eligible.
• CPP contributions are tax credits for individuals and tax deductible for employers.
• Self-employed contributors must contribute both the employer and employee portions, entitling them to the associated tax benefits.
• Pensioners who worked in Quebec receive the QPP; others receive CPP.

Pension Benefits under CPP/QPP

• Individuals may start collecting CPP/QPP benefits between the ages of 60 and 70.
• Collecting CPP/QPP before 65 reduces pension benefits.
• Collecting CPP/QPP after 65 increases pension benefits.

Disability, Survivor and Death Benefits under CPP/QPP

• Disability Benefits are provided to individuals no longer able to work at any job on a regular basis due to long-term disability.
• At age 65, disability benefits automatically convert to a retirement pension.
• Survivor Benefits are paid to the estate, surviving spouse/common-law partner, or dependent children of a deceased contributor.
• Death Benefits include a lump sum payment to the estate of a deceased contributor.

Employer-Sponsored Registered Pension Plans

• Defined Benefit Pension Plan (DBPP) defines the benefit an individual will receive at retirement, is known and guaranteed, and is calculated based on the type of plan.
• Defined Contribution Pension Plan (DCPP) defines the contribution that an individual/employer makes each year before retirement; there is no guaranteed benefit amount or retirement formula.
• Individual Pension Plan (IPP) is a maximum funded defined benefit pension plan typically set up by incorporated professionals or profitable corporations for senior executives. It's suitable for individuals over 40 earning $100,000+ per year.

Deferred Profit Sharing Plan (DPSP)

• Only employers can make tax deductible contributions to a DPSP.
• Contributions are only made when the company has a profitable year.
• Investment growth is tax-sheltered until the employee withdraws money from the plan.

Pension Adjustment (PA)

• Individuals in an employer's registered pension plan or DPSP have their RRSP contribution limits reduced by a pension adjustment (PA).

Past Service Pension Adjustment (PSPA)

• PSPA occurs when DBPP benefits are increased, decreasing an individual's RRSP contribution limit.
• This adjustment occurs only when the DBPP benefit is changed.

Pension Adjustment Reversal (PAR)

• PAR occurs when DBPP member benefits are reduced or terminated, increasing the RRSP contribution limit.

RRSP Contribution Limits

• Any unused RRSP contribution limit from the previous year, plus 18% of the investor's previous year's income (up to a maximum) minus net changes regarding pension adjustment, plus any past service pension adjustment, plus any pension adjustment reversal

RRSPs and Tax Deductions

• Investors can deduct RRSP contributions made during the year and the first 60 days of the following year from their total income.
• Contributions made in the first 60 days of a calendar year can be applied to the previous or current year.
• Investors can carry forward unused deductions if they do not use them in the current year.

RRSPs and Tax Deferral

• RRSP investments are not taxed until withdrawn.
• Since income earned inside an RRSP is tax-sheltered, RRSP investments grow much faster than non-registered investments.

Qualified Investments

• The Income Tax Act restricts the types of investments allowed in RRSPs.
• Some investments that qualify are:
  • cash
  • GICs
  • term deposits
  • T-bills
  • bonds
  • mortgages
  • stocks
  • mutual funds
  • ETFs
  • rights
  • warrants
  • covered call options
  • gold
  • annuities

Types of RRSPs

• Managed RRSPs
  • Typically holds a single type of investment such as GICs, CSBs, or mutual funds
  • Usually held and managed by a trustee (trust company or bank).
• Group RRSPs
  • Collection of managed RRSPs grouped for administrative purposes
  • Sponsored by an employer, union, or professional association.
  • Administered by a financial institution, securities dealer, or insurance company.
• Self-directed RRSPs
  • The investor selects from a wide variety of investment options and can customize the plan
  • A trustee, such as a trust company, bank, investment company, or broker sponsors and administers the plan, charging a fee.
• Spousal RRSPs
  • Usually, the higher-income spouse is the contributor, while the lower-income spouse is the annuitant.
  • If the lower-income spouse has RRSP contribution room, they can also contribute to their own RRSP.

Withdrawing from RRSPs

• Lump Sum Withdrawal
  • All money withdrawn from an RRSP is subject to income tax, withheld before deposit.
  • The amount of tax depends on the amount withdrawn and the province of residence.
• Home Buyer's Plan (HBP) Withdrawal
  • First-time home buyers can withdraw up to $25,000 tax-free from their RRSPs to buy a principal residence.
  • The investor must have a written agreement to build/buy a home and complete the transaction by October 1st of the following year.
  • If multiple individuals jointly purchase the home, each can withdraw up to $25,000.
• Lifelong Learning Plan Withdrawal
  • The LLP allows individuals to withdraw up to $20,000 (max $10,000 per year) from RRSPs to finance full-time training or education for themselves, spouses, or common-law partners.

RRSP Maturity Options

• Investors must terminate/convert matured RRSPs by December 31st of the year they turn 71.
• Options, other than a lump sum withdrawal, include:
  • Registered Life Annuity: Provides a lifelong, steady stream of income to the annuitant.
  • Registered Term Certain Annuity: Provides a steady stream of income for a specified number of years.
  • Registered Retirement Income Fund (RRIF): Distributes RRSP assets as retirement income; can hold the same qualified investments as RRSP, but contributions aren't allowed. Individuals must withdraw a minimum each year; RRIF payments are taxable/reportable on tax returns.

RRSP Attribution Rules

• The CRA has special attribution rules regarding withdrawals from spousal RRSPs.
• If your spouse or common-law partner withdraws from a spousal RRSP in the year you contribute to that plan or in the next two calendar years, the withdrawal is taxed in the contributor's hands.
• After that period, any withdrawals are taxed in the annuitant's hands.

Life Income Funds and Locked-In Retirement Income Funds

• Investors holding an LRSP or LIRA must convert by December 31st of the year they turn 71 to one of the following account types:
  • Life Income Fund
  • Locked-In Retirement Fund
  • Prescribed Retirement Fund
• Transfer options include a provision that places a maximum limit on the amount individuals withdraw during a calendar year.
• The investor’s option relies on the provincial/federal jurisdiction where the plan was set up since different jurisdictions offer different options.