Retirement PDF - Canadian Investment Funds Course

Canadian Investment Funds Course Unit 9: Retirement Introduction As a Dealing Representative, your clients will expect you to know about retirement savings planning. In this unit, you will learn about the various types of public and private retirement savings plans. You will also become familiar wit...

Canadian Investment Funds Course Unit 9: Retirement Introduction As a Dealing Representative, your clients will expect you to know about retirement savings planning. In this unit, you will learn about the various types of public and private retirement savings plans. You will also become familiar with the different types and features of Registered Retirement Savings Plans (RRSPs), and the rules surrounding contribution limits. This unit takes approximately 1 hour and 45 minutes to complete. Lessons in this unit: Lesson 1: Government and Employer Plans Lesson 2: Registered Retirement Savings Plans (RRSPs) Lesson 3: Withdrawing from RRSPs Lesson 4: Locked-In Accounts © 2021 IFSE Institute 309 Unit 9: Retirement Lesson 1: Government and Employer Plans Introduction As a Dealing Representative, it is very important that you understand the different types of government and employer plans that are available to create a sound investment strategy for your clients. This lesson takes approximately 45 minutes to complete. By the end of this lesson, you will be able to: identify ways in which people finance their retirement describe the main features of the following government-sponsored programs: - Old Age Security (OAS) - Guaranteed Income Supplement (GIS) - Allowance - Allowance for the Survivor - Canada Pension Plan (CPP) - Quebec Pension Plan (QPP) describe the main features of the following employer-sponsored programs: - Defined benefit pension plans (DBPPs) - Defined contribution pension plans (DCPPs) - Individual pension plans (IPPs) - Deferred profit sharing plans (DPSPs) - Non-Registered Savings Plan (NREG) explain the concept of the pension adjustment, past service pension adjustment, and pension adjustment reversal discuss the pension income splitting rules 310 © 2021 IFSE Institute Canadian Investment Funds Course How Do People Finance Their Retirement? Many Canadians share the investment goal of having a comfortable retirement. To retire at our desired age, we must develop an investment strategy that will provide enough money at retirement to support the desired retirement lifestyle. Most of us expect to retire around the age of 65 with enough post-retirement income to maintain the standard of living we have enjoyed before leaving our jobs. Graphically, a retirement strategy can include some of the following elements for retirement income benefits: Government Sponsored Retirement Programs Employer Sponsored Pension Plans Retirement RRSPs Other Savings and Assets Government-Sponsored Retirement Programs There are two main government-sponsored programs that can help finance retirement: Old Age Security (OAS) Canada Pension Plan (CPP)/Québec Pension Plan (QPP) Old Age Security (OAS) Program The Old Age Security program includes four public pension benefits: Old Age Security (OAS) pension Guaranteed Income Supplement (GIS) Allowance © 2021 IFSE Institute 311 Unit 9: Retirement Allowance for the Survivor The benefits paid by the federal government through each of these programs are funded by general tax revenues. In other words, there is no contribution requirement for individuals to qualify for OAS benefits. The only qualifying criteria are age and a residency requirement. OAS program benefits are indexed every quarter to address increases in the cost of living. OAS program benefits are not paid automatically to eligible recipients when they turn 65. Rather, the program requires that your eligible clients apply to begin receiving the OAS benefit. All OAS program benefits are subject to a “means test”. If your client’s income exceeds a certain minimum, their OAS program benefits will be reduced, or “clawed back”. Old Age Security (OAS) Pension The OAS pension is a monthly pension payment payable to eligible individuals. OAS pension benefits are considered taxable income. To be eligible for full payment, your client must: be 65 or older be a Canadian citizen or legal resident of Canada at the time of application approval OR if your client no longer lives in Canada (a non-resident), they were a Canadian citizen or legal resident of Canada on the day preceding the day of departure from Canada have lived in Canada for a minimum of 10 years (or 20 years for non-residents) after reaching age 18 Individuals who have lived in Canada for 40 years after the age of 18 are eligible for 100% of the OAS pension benefit. Partial OAS pension benefit is available for those individuals who have lived in Canada for fewer than 40 years after age 18. A partial OAS pension is calculated at the rate of 1/40th of the full OAS pension for each complete year of residence in Canada after age 18. The table below summarizes the eligibility criteria. 312 © 2021 IFSE Institute Canadian Investment Funds Course After age 18 and: OAS Pension Benefit lived in Canada for 40 years or more Yes, eligible for full OAS pension benefit lived in Canada for less than 40 years, but more than 10 years (20 years for a non-resident) Yes, eligible for partial OAS pension benefit lived in Canada for less than 10 years (20 years for a non-resident) No benefit Example Alice, age 68, has been living outside of Canada for the last 20 years after reaching the age of 18. She is eligible for partial OAS pension benefit. Alice’s earned income in the last year before she moved out of Canada was $50,000. Alice lived in Canada for 30 full years, so her partial OAS pension benefit would be calculated as: [30 years x (1 ÷ 40)] x $613.53 (Maximum OAS amount for 2020) = $460.15 Applying for OAS Service Canada now has a process to automatically enroll seniors who are eligible to receive the OAS pension. If your client is eligible to be automatically enrolled, Service Canada will send them a notification letter the month after they turn 64. If your client did not receive a letter from Service Canada informing you that they were selected for automatic enrolment, they must apply for the OAS pension. In deciding when to apply for your OAS pension, consider your client’s personal financial situation. Note: As directed under Bill C-30 (Division 31 of Part 4) which received royal assent, OAS pension payable to individuals 75 and over is set to increase by 10%. It also provides for a one-time payment of $500 to pensioners who are 75 years or older, to be paid out of the Consolidated Revenue Fund. Deferring OAS As of July 2013, your client can defer receiving Old Age Security (OAS) pension for up to 60 months (5 years) after the date they become eligible for an OAS pension in exchange for a higher monthly amount. If your client delays receiving your OAS pension, the monthly pension payment will be increased by 0.6% for every month that they delay receiving it, up to a maximum of 36% at age 70. If your client chooses to defer receipt of OAS, they will not be eligible for Guaranteed Income Supplement (GIS) and their spouse or common law will not be eligible for the Allowance benefit for the period that OAS is delayed. © 2021 IFSE Institute 313 Unit 9: Retirement OAS Pension Clawback As mentioned earlier, the OAS pension benefit is subject to a “means test”. For example, at current 2019 rates, for every $1 of net income your client earns over $77,580, they lose $0.15. This reduction in benefits is commonly referred to as an OAS “clawback”. At an income level of $126,058, a recipient of the OAS pension benefit will have to repay the entire amount. The threshold amount is updated every year. The chart below provides additional information for specific income years. Recovery Tax Period Income Year Minimum Income Recovery Threshold Maximum Income Recovery Threshold July 2019 to June 2020 2018 $75,910 $123,386 July 2020 to June 2021 2019 $77,580 $126,058 July 2021 to June 2022 2020 $79,054 $128,137 Example Roderick, age 66, has earned income of $100,000 during 2019. As a result, his income exceeds the OAS threshold income by $22,420, calculated as $100,000 - $77,580. He will have to repay $3,363 of his OAS pension benefit, calculated as $22,420 x $0.15. Guaranteed Income Supplement (GIS) The Guaranteed Income Supplement (GIS) is available to low-income pensioners. This benefit is payable only to individuals who qualify for the OAS pension benefit. GIS is a tax-free benefit and is paid on top of the OAS pension. Individuals who have no sources of income other than the OAS pension benefit will receive 100% of the GIS. If an individual your client defers his or her OAS pension benefit, the GIS benefit is also deferred for the same period. There are four criteria used to determine your client’s payment amount, as well as the maximum income threshold where they are no longer eligible: 1. if your client is single, widowed or divorced; 2. if your client’s spouse/common law receives full OAS; 3. if your client’s spouse/common-law does not receive full OAS or allowance; 4. if your client’s spouse/common- law partner receives the allowance GIS benefits are “means tested”. For the most part, GIS payments are reduced by $1 for every $2 of base income, excluding OAS pension income. However, the actual amount is determined using a set of complex tables. 314 © 2021 IFSE Institute Canadian Investment Funds Course Applying for GIS In December 2017, Service Canada implemented a process to automatically enroll seniors who are eligible to receive the GIS. If you can be automatically enrolled, Service Canada will send you a notification letter the month after you turn 64. If you did not receive a letter from Service Canada informing you that you were selected for automatic enrolment, and you wish to start receiving your OAS pension and the GIS at age 65, you should apply for them right away. Example Gillian, age 68, is a single pensioner with an annual income of $26,000. She received OAS payments of $7,362.36 last year. The maximum income threshold to receive a GIS payment for 2020 is $18,600. Gillian does not qualify for GIS as her income ($18,637.64) is higher than the threshold (calculated as $26,000$7,362.36). Allowance The Allowance is a benefit available to low-income individuals aged 60 to 64 who are the spouse or commonlaw partner of a Guaranteed Income Supplement (GIS) recipient. To qualify for the Allowance, an individual must meet all of the following conditions: is 60 to 64 (includes the month of your 65th birthday); has a spouse or common-law partner that receives an Old Age Security pension (OAS) and is eligible for the GIS; is a Canadian citizen or a legal resident; resides in Canada and has resided in Canada for at least 10 years since the age of 18; and the annual combined income of both the GIS recipient and their spouse or common-law partner is less than the maximum allowable annual threshold. Other situations where individuals might qualify for the Allowance: if the individual meets all the above eligibility conditions, but their spouse or common-law partner does not receive the OAS pension or the GIS because they are incarcerated © 2021 IFSE Institute 315 Unit 9: Retirement if the individual has not resided in Canada for at least 10 years since they turned 18, but they have resided or worked in a country that has a social security agreement with Canada, they may still qualify for a partial benefit. For the list of countries with which Canada has established a social security agreement, refer to the Canada Revenue Agency for Lived or living outside Canada. Individuals are reviewed every year to determine whether they continue to be eligible for the Allowance. The Allowance stops the month after your 65th birthday, when you may become eligible for the OAS pension and possibly the GIS. Applying for the Allowance Your client should apply for the Allowance 6 to 11 months before their 60th birthday. Applications must be made in writing using the appropriate Allowance for Survivor forms and including certified true copies of the required documentation. Allowance for Survivor The Allowance for Survivor is a benefit available to low-income seniors who meet the following criteria: has a spouse or common law partner that has died and the person has not remarried or entered into a common-law partnership is 60 to 64 (includes the month of your 65th birthday); is a Canadian citizen or a legal resident at the time the Allowance for survivor was approved, or the last time they lived in Canada; has lived in Canada for at least 10 years after reaching the age of 18. Currently, the maximum allowance for a survivor is $1,388.92 per month, tax-free. The allowance for survivor stops being paid in the following situations: the individual has not filed an individual Income Tax and Benefit Return with the CRA by April 30 th, or if, by the end of June each year, CRA has not received the information about the net income for the previous year; the individual leaves Canada for more than six consecutive months; the individual’s net income is above the maximum annual threshold of $25,056.00 the individual is incarcerated in a federal penitentiary because of a sentence of two years or longer; 316 © 2021 IFSE Institute Canadian Investment Funds Course the individual has reached the age of 65 (payment stop the month after your 65 th birthday when you become eligible for the Old Age Security) the individual remarries or lives in a common-law relationship for more than 12 months; or the individual dies Example Nermina is 60 years old, and her spouse passed away. Her spouse was receiving the maximum allowance before he passed away. Nermina does not have any income, thus the maximum allowance that Nermina could receive is $1,388.92. Guaranteed Income Supplement (GIS), Allowance, Allowance for the Survivor Exemption Amounts Starting in July 2020, new income exemptions for the purposes of calculating the Guaranteed Income Supplement, Allowance, and Allowance for the Survivor were introduced. The new exemptions exclude the first $5,000 (existing limit of $3,500) of a person’s employment and self-employment income as well as 50% of their employment and self-employment income greater than $5,000 but not exceeding $15,000. The exemption is extended to self-employment income beginning with the July 20-21 benefit year. Canada Pension Plan (CPP) and the Québec Pension Plan (QPP) The Canada Pension Plan (CPP) is a federally-administered program designed to provide the following: retirement benefits survivor benefits disability benefits death benefits The benefits paid through each of these programs are funded using individual contributions. In other words, an individual (or his or her family) is not eligible to receive CPP program benefits unless they have made contributions to the program. CPP program benefits, except for the death benefit, are indexed annually for increases in the cost of living. In order to receive CPP program benefits, eligible individuals must apply. Benefits are not automatically paid once someone reaches the age of eligibility. Applications are accepted via two methods; online through the My Service Canada Account, or via paper forms mailed to the applicable Provincial CPP office. The CPP program is designed to replace about 25% of an individual’s pre-retirement earnings. © 2021 IFSE Institute 317 Unit 9: Retirement CPP is payable to all eligible Canadians except those who worked in Québec. Benefits received under the Canada Pension Plan are taxable. The Québec Pension Plan (QPP), sponsored by the Québec provincial government, provides benefits similar to those offered by the Canada Pension Plan (CPP) to workers in Québec. (The CPP does not apply in Québec.) The federal government and the Québec provincial government closely coordinate the CPP and QPP. Benefits received under the Québec Pension Plan are taxable. Who Contributes to CPP/QPP? An individual must contribute to the CPP/QPP if they do the following: work in Canada are over 18 years of age and have pensionable employment income exceeding the year's basic exemption (YBE) of $3,500 Payments into the CPP/QPP are tax deductible for employers and a tax credit for individuals. Since 2001, selfemployed individuals can deduct half of their contributions and claim a tax credit for the other half. Individuals do not make contributions if they are collecting CPP/QPP disability benefits, they are not in the workforce, or they reach age 70. Making CPP/QPP Contributions CPP/QPP payments are based on mandatory contributions made by workers and their employers. Selfemployed individuals are required to make both the employee and the employer portions of the contribution. Contributions are calculated based on a percentage of a person’s annual earnings between a minimum, known as the year's basic exemption, or YBE; and a maximum, known as the year's maximum pensionable earnings, or YMPE. Effective 2020, the YMPE is $58,700 and the contribution rates are 5.25% for both the employee and employer portions of the contribution. For the QPP, the contribution rates are 5.4% for both the employee and employer portions of the contribution. Contribution rates and contribution limits are set to increase each year until 2023: 318 Year Employer/Employee Rate Self-Employed Rate 2021 5.45% 10.9% 2022 5.70% 11.4% 2023 5.95% 11.9% © 2021 IFSE Institute Canadian Investment Funds Course Additional Maximum Pensionable Earnings Starting in 2024, a second, higher limit will be introduced, allowing your client to invest an additional portion of their earnings to the CPP. This new limit, known as the year’s additional maximum pensionable earnings, will not replace the first earnings ceiling. Instead, it will subject their earnings to two earnings limits. This limit is referred to as the second earnings ceiling. This new range of earnings covered by the Plan will start at the first earnings ceiling (estimated to be $69,700 in 2025) and go to the second earnings ceiling which will be 14% higher by 2025 (estimated to be $79,400). Like the first earnings ceiling, the second will increase each year to reflect wage growth. Example In 2020, Avi had pensionable earnings of $100,000. He and his employer must each contribute 5.25% of Avi’s pensionable earnings to the CPP, up to the YMPE. As shown in the figure below, CPP contributions are made based on pensionable earnings between the YMPE and the YBE. Currently, the maximum employee/employer contribution is $2,898.00 each, calculated as ($58,700 - $3,500) x 5.25%. Early Collection of CPP/QPP Retirement Pension Benefits As a Dealing Representative, you may need to help your clients determine when to begin collecting CPP/QPP retirement pension benefits, as part of their overall financial and retirement planning. An individual may choose to collect CPP/QPP retirement pension benefits at any time between the ages of 60 and 70. It is not © 2021 IFSE Institute 319 Unit 9: Retirement necessary to stop working to receive a retirement pension. Under the CPP/QPP, normal retirement is considered to begin at age 65. If an individual chooses to start collecting their pension prior to age 65, the CPP/QPP pension benefit is decreased. The table below provides the reduced CPP amounts. If pension starts at: Reduction % 60 (60 months x 0.6%) = 36% 61 (48 months x 0.6%) = 28.8% 62 (36 months x 0.6%) = 21.6% 63 (24 months x 0.6%) = 14.4% 64 (12 months x 0.6%) = 7.2% Example In January of 2020, Bill decided to retire early from his teaching position, a year and a half before he turns 65. Assuming he qualifies for full CPP, Bill will receive a monthly pension of $1,048.84. Calculated as $1,175.83 x 89.2%. Late Collection of CPP/QPP Retirement Pension Benefits If an individual chooses to start collecting CPP/QPP pension benefits after age 65, the pension benefit is increased. Currently, the amount of the retirement pension is increased by 0.7% for every month after a person’s 65th birthday until age 70. This represents a maximum increase of 42%. Example Aurora, age 65, is eligible to receive the full CPP pension. However, she has decided to delay her pension until she is age 70. Based on current figures, Aurora will receive a monthly pension of $1,669.78, calculated as $1,175.83 x 142%. CPP Disability, Survivor and Death Benefits Disability benefits are payable to eligible CPP contributors who are no longer able to work at any job on a regular basis. The disability must be long-lasting or likely to result in death. There is also a children’s benefit available for the children of individuals who receive the CPP disability benefit. Survivor benefits are paid to the 320 © 2021 IFSE Institute Canadian Investment Funds Course estate, surviving spouse or common-law partner, and dependent children of a deceased contributor. In addition to survivor benefits, a lump sum death benefit is payable to the estate of a deceased contributor. For individuals receiving the CPP Disability benefit, when they turn 65 the benefit is automatically converted to a retirement pension. They do not need to apply. Employer-Sponsored Registered Pension Plans (RPPs) In order to provide employees with an additional incentive to remain with the company, many employers provide benefits designed to provide employees with a pension at retirement. Registered pension plans are registered in accordance with the pension legislation of the jurisdiction, federal or provincial, in which the plan is offered. In addition, registered pension plans must meet certain registration requirements under the Income Tax Act, which is administered by the Canada Revenue Agency. There are three basic types of registered pension plans: defined benefit pension plans defined contribution pension plans pooled registered pension plans Employers generally sponsor pension plans, although in some cases unions may sponsor them. As the Pension Administrator, the plan sponsor has the responsibility for funding the plan. An employer may make all of the contributions to a registered pension plan; although employees are often required to make contributions as well. Investment earnings on deposits within the plan grow tax-free; however, retirement benefits are taxable to the employee when they begin to withdraw money from the plan. Employee and employer contributions are tax deductible. Registered pension plan benefits are also creditor-proof, so employees cannot lose their pension benefits if they are bankrupt. As a Dealing Representative, it is important to understand employer-sponsored pension plans. Along with government pensions, these will form the foundation of a client’s retirement income. Understanding their pensions will allow you to advise on what they must do personally to supplement their retirement incomes using RRSPs, TFSAs and other investment vehicles available to them. Defined Benefit Pension Plans (DBPPs) A DBPP defines the benefit that an individual will receive at retirement. The benefit is known and guaranteed and is calculated based on the type of plan. The pension plan can use the employee's average pensionable earnings to calculate the benefit. Employees' average pensionable earnings will be based on one of the following: their earnings throughout their career with the employer © 2021 IFSE Institute 321 Unit 9: Retirement their earnings over their final years with the employer, usually 3 or 5 years their best earning years with the employer, usually 3 or 5 years This formula is used to calculate the benefit. Average Pensionable Earnings x Accrual Rate x Years of Service The accrual rate is the percentage specified by the plan sponsor used to calculate the benefit entitlement. It is usually between 1% and 2% and is applied to an individual’s average pensionable earnings as determined above. The last part of the calculation refers to the number of years of credited service. The pension can also be based on a flat monthly amount. In this case, the plan would use the following calculation to determine an employee's benefit. (Flat Monthly Benefit Amount x 12) x Years of Service Defined Contribution Pension Plans (DCPPs) A DCPP, also known as a money purchase plan, defines the contribution that an individual and his or her employer will make each year before the employee’s retirement. The amount that the employee will receive at retirement is not guaranteed and there is no retirement formula. Since the amount that the person will have at retirement depends on how well the investments are managed, the employee is often provided with the option to choose their investments from a pre-determined list of investment options. NOTE: The current trend among employers has been to move away from DBPPs to DCPPs, since DCPPs present less risk to corporations. 322 © 2021 IFSE Institute Canadian Investment Funds Course Example Babul, Oliver, and Janine are set to retire from their respective employers. The following chart highlights the information needed to determine the amount of their retirement benefit: Formula Applicable Amount Accrual Rate Years of Service Babul Career Average $85,000 1.5% 30 Oliver Best 5 Years Average $75,000 1.5% 30 Janine Flat Benefit $100 per month N/A 30 Their retirement benefit would be calculated as: Babul: $85,000 x.015 x 30 = $38,250 per year Oliver: $75,000 x.015 x 30 = $33,750 per year Janine: ($100 x 12) x 30 = $36,000 per year Pooled Registered Pension Plans (PRPPs) A PRPP is a retirement savings option for individuals, including self-employed individuals. It enables its members to benefit from lower administration costs that result from participating in a large, pooled pension plan. It's also portable, so it moves with its members from job to job. To be eligible, an individual must: have a valid Canadian social insurance number (SIN) work in a federally regulated business or industry for an employer who chooses to participate in a PRPP be employed or self-employed in Yukon, Northwest Territories and Nunavut or live in a province that has the required provincial standards legislation in place. An individual can be enrolled into a PRPP by either: their employer (if the employer chooses to participate in a PRPP), or a PRPP administrator (such as a bank or insurance company) The investment options within a PRPP are like those for other registered pension plans. As a result, its members can benefit from greater flexibility in managing their savings and meeting their retirement objectives. © 2021 IFSE Institute 323 Unit 9: Retirement Individual Pension Plans (IPPs) An IPP is a maximum funded defined benefit pension plan usually set up by incorporated professionals, such as dentists, or by profitable corporations for their senior executives. A maximum funded IPP is one where the accrual rate is 2%. IPPs are ideally suited for individuals who are over the age of 40 and earn more than $100,000 per year. There are several advantages to these types of plans, including: annual contribution limits are higher than for other registered savings plans contributions are tax deductible to the corporation contributions can be made based on past service retroactive to 1991 retirement benefit is known and guaranteed additional contributions are allowed if investment performs poorly investment growth is not taxed until withdrawals are made from the plan pension benefits are creditor proof Deferred Profit Sharing Plans (DPSPs) A DPSP is a plan in which an employer sets aside a portion of its profits for the benefit of some or all of its employees. Only the employer may make contributions to a DPSP. The plan can be set up such that contributions are only made when the company has a profitable year. Unlike registered pension plans, the employer is not obligated to make plan contributions every year. In addition, employer contributions are tax deductible. The employee benefits from a DPSP since the plan may be set up in addition to other registered savings plans provided by the employer. As a registered savings plan, any investment growth is tax-sheltered until the employee withdraws money from the plan. Most plans have a vesting period which is an amount of time that must transpire before benefits in the retirement plan are unconditionally owned by the individual. Pension Adjustment (PA) In order to maintain fairness in Canada’s retirement income system, employees who belong to a registered pension plan or a DPSP are restricted in their ability to contribute to individual registered retirement savings plans (RRSPs). In Canada, approximately 40% of employees are covered by a registered pension plan; the remainder must rely on RRSP contributions to save for their retirement. If any of your clients participate in their employer's registered pension plan or DPSP, their current RRSP contribution limits are reduced by a pension adjustment (PA). The pension adjustment reflects the amounts contributed by the client and his or her employer to a DBPP, DCPP, or a DPSP in the previous year. 324 © 2021 IFSE Institute Canadian Investment Funds Course Pension Adjustment (PA) Calculation The amount of the PA depends on the type of registered plan in which the employee is participating. In general, the PA represents the amount contributed, or deemed to have been contributed, by the employee or employer. The table below highlights how the annual PA is determined for each plan type. Plan Type Annual Pension Adjustment (PA) Defined Contribution Pension Plan Amount of employer and employee contributions Defined Benefit Pension Plan (9 x accrual rate x pensionable earnings) - $600 Deferred Profit Sharing Plan Amount of employer contributions Example Mandeep, Maeva, Jeevun, and Maansi all earn $100,000 per year. Based on this income level, they can each contribute $18,000 next year to an RRSP. However, Mandeep and her employer deposited a total of $10,000 to a DCPP, Maeva’s employer deposited $5,000 to a DPSP, and Jeevun belongs to a DBPP that has an accrual rate of 1.5%. Maansi’s employer does not offer a registered savings plan. As a result, their RRSP contribution room will be adjusted as follows: Employee Mandeep Annual Pension Adjustment (PA) RRSP Contribution Limit $10,000 $8,000 ($18,000 - $10,000) Maeva $5,000 $13,000 ($18,000 - $5,000) Jeevun $12,900 (9 x 0.015 x $100,000) - $600 $5,100 ($18,000 - $12,900) Maansi $0 $18,000 Past Service Pension Adjustment and Pension Adjustment Reversal A past service pension adjustment (PSPA) occurs when the benefits of a DBPP are increased or upgraded, Similar to a pension adjustment (PA), a PSPA will decrease an individual’s current RRSP contribution limit by the amount of the PSPA. Whereas a PA occurs in each year that someone is a member of a registered pension plan, a PSPA occurs much less frequently. A pension adjustment reversal (PAR) occurs when the benefits to be received by a DBPP member are reduced or terminated. Typically, a PAR occurs when a pension plan member leaves the employer before they reach © 2021 IFSE Institute 325 Unit 9: Retirement retirement age. Similarly, a PAR can occur when non-vested DPSP contributions are returned to the employer in the subsequent year(s) after when the contributions were made. The effect of a PAR is to increase the RRSP contribution limit (in other words, give the RRSP contribution room back from previous years). Example Paul, a member of a DPSP, ends his employment on June 12, 2019, after working for 18 months. His pension adjustment was $1,000 in 2018 and $500 in 2019. Under his employer’s plan, he has to work 24 months in a row before he is vested (entitled to benefits). Paul forfeits his rights to employer contributions made to the plan on his behalf, and any earnings on the employer contributions, because he only worked for 18 months. Expressed in numbers, this means he forfeits his right to the employer’s contribution of $1,500, as well as $215 of interest on this contribution. The employer’s contributions were included in his PA. PAR = $1,000 + $500 PAR = $1,500 Paul’s 2019 PAR is $1,500, the amount of the employer’s contributions that were included in his PA but that he did not receive because he was not vested at termination. The $215 was never included in Paul’s pension credits for the PA calculation, so it is not included in his PAR. The employer still has to report the 2019 PA of $500. Pension Income Splitting Certain pension income, referred to as eligible pension income, may be split between a pensioner and their spouse or common-law partner. The advantage of pension income splitting is that 1/2 of the pension income that would have been taxed in the hands of the pensioner can be taxed in the hands of the spouse or common-law partner. If the spouse or common-law partner is in a lower tax bracket, the couple will save on taxes. Some of the types of income that a pensioner can split when the pensioner is 65 years of age or older include: the taxable portion of life annuity payments a pension income from a DBPP or DCPP DPSP income RRSP income RRIF income regular annuity payments 326 © 2021 IFSE Institute Canadian Investment Funds Course When a pensioner is less than 65 years of age, these amounts can only be split with a spouse or common-law partner if received directly from a pension plan or if they were received as a result of the death of a spouse or common-law partner. Non-Registered Savings Plans Employers may offer various types of non-registered savings plans within the group plan. Some of the types of non-registered savings plans are: Non-Registered Savings Plan Employer Profit Sharing Plan After-Tax Savings Vehicle Savings Plans Money that is deposited into non-registered savings plans has already been taxed. As such, withdrawals will not be subject to tax, as taxes were already withheld. If there is any growth on the invested assets, the growth may be subject to investment income tax, dividends tax, and/or capital gains or losses tax. © 2021 IFSE Institute 327 Unit 9: Retirement Lesson 2: Registered Retirement Savings Plans Introduction Different investors have different retirement savings requirements, depending on their current situation and future plans. This lesson defines the concept of an RRSP and explains the types of investments that qualify for RRSPs, as well as some of the benefits. You will also learn about different types of RRSPs and why they might be most appropriate for a given client. You will learn about managed RRSPs, self-directed RRSPs, group RRSPs and spousal RRSPs. This lesson takes approximately 30 minutes to complete. By the end of this lesson, you will be able to: describe the concept of an RRSP, including: - eligibility - contribution limits - tax deduction - tax deferral - qualified investments - overcontribution allowances and penalties describe the types of RRSPs: - managed (also called regular, basic, or individual) - group - self-directed - spousal explain the tax benefits of contributing to a spousal RRSP and the attribution rules 328 © 2021 IFSE Institute Canadian Investment Funds Course Making RRSP Contributions A registered retirement savings plan (RRSP) is a type of registered savings plan set up under the Income Tax Act and registered with the Canada Revenue Agency. An RRSP is not an investment; you cannot buy an RRSP. Instead, an RRSP is a registered investment vehicle within which investors can deposit various types of investments. In order to contribute to an RRSP, an individual must have earned income. An individual may only contribute into his or her own RRSP up until December 31 of the year in which they turn 71 years of age. After that date, they may contribute to a spousal plan up until December 31 of the year in which the spouse turns age 71. Contributions to an RRSP may take the form of cash or in-kind (non-cash) contributions. A cash contribution is made for its cash value. On the other hand, in-kind contributions are made at their current market value. If the market value exceeds the purchase price, the investment income must be reported on the investor’s tax return when the asset is transferred into the RRSP. Example Freddie owns 500 units of the Ultima Canadian Equity Fund. Freddie purchased the units for $8,000 and they have a current fair market value of $10,000. If Freddie makes an in-kind contribution to his RRSP using these fund units, his RRSP contribution will be valued at $10,000 and he will have to report a capital gain of $2,000, calculated as $10,000 - $8,000, on his income tax return, which is taxable. RRSP Contribution Limits The annual RRSP contribution limit refers to the maximum amount that an individual can contribute into his or her RRSP each year. The RRSP contribution limit for the current year is based on five components, and is calculated as: 1. 18% of the investor’s previous year’s earned income, up to the maximum annual RRSP contribution limit PLUS 2. Any unused RRSP contribution limit as of the end of the previous year MINUS 3. Net changes with respect to the investor’s pension adjustment (PA) MINUS 4. Any past service pension adjustment (PSPA) PLUS 5. Any pension adjustment reversal (PAR) © 2021 IFSE Institute 329 Unit 9: Retirement (1) Refers to the current year's RRSP contribution limit (2) Refers to the carry forward of unused RRSP deduction room (3), (4), and (5) Refers to adjustments for participants in a Registered Pension Plan (RPP) or Deferred Profit Sharing Plan (DPSP) The annual RRSP contribution limit is not a straight-forward calculation. In order to make it easier to determine the amount that an individual can contribute to his or her RRSP, the Canada Revenue Agency provides each person with a notice after they have assessed that person’s tax return. Among other things, this Notice of Assessment (NOA) reports the RRSP contribution limit for the tax year following the tax year to which the NOA applies. Annual RRSP Contribution Limit RRSP contribution room can be calculated each year based on the lesser of: 18% of previous year's earned income the maximum annual RRSP contribution limit Earned income generally includes net income from employment, business, and rental property, but does not include investment income (except for net rental income from property). The maximum annual RRSP contribution limit changes every year with changes in the average industrial wage, a statistic reported annually by Statistics Canada. Example Mario has earned income of $50,000. The current maximum annual RRSP contribution limit for the year in question is $27,830. Mario's annual RRSP contribution limit is $9,000, the lesser of: $9,000, calculated as ($50,000 x 18%) $27,830 (CRA Maximum) Carry Forward of Unused RRSP Room If an individual does not contribute the maximum to their RRSP, they can carry forward the remainder of the annual contribution to another year. The individual can contribute at a future date based on this carry forward amount. RRSP contribution room can be carried forward until the end of the year in which the individual reaches age 71. 330 © 2021 IFSE Institute Canadian Investment Funds Course RRSP Overcontribution In order to protect individual investors who may miscalculate their maximum contribution limit, investors are allowed to over-contribute to their RRSPs by up to $2,000. This is a lifetime maximum, not an annual allowance. Anyone who over-contributes to an RRSP by more than $2,000 may be subject to a penalty tax of 1% of the excess for each month that they are above the $2,000 limit. In general, the penalty tax may be avoided if they take steps to withdraw the excess contributions from the RRSP account. Any RRSP withdrawals must be reported as income on an individual’s tax return. Adjustments for RPPs and DPSPs For participants in a registered pension plan (RPP) or deferred profit sharing plan (DPSP), there may be adjustments to their RRSP contribution limit based on these plans. They will be in the form of: pension adjustments past service pension adjustments pension adjustment reversals Example Janice is a renowned scientist and university professor. Her earned income was $130,000. She is a member of the university’s pension plan and has a pension adjustment of $12,000. She also has unused RRSP contribution room of $25,000. The maximum RRSP contribution limit for the year in question is $27,830. To calculate Janice's RRSP contribution limit, she must first determine the amount of her annual RRSP contribution limit. It is $23,400, the lesser of: $23,400, calculated as ($130,000 x 18%) $27,830 Then, she adds the $25,000 of carry forward unused RRSP contribution room. Lastly, she deducts the pension adjustment of $12,000. Janice can contribution a total of $36,400, calculated as ($23.400 + $25,000 - $12,000). RRSPs & Tax Deductions Your clients can deduct RRSP contributions from their total income. This reduces the amount of income tax they pay. The total income tax deduction that an individual may claim for a calendar year is determined by his or her RRSP contributions during the year and the first 60 days of the following year. Contributions made in © 2021 IFSE Institute 331 Unit 9: Retirement the first 60 days of a given calendar year can be applied to the previous year rather than the year in which they were made. Investors can also carry forward unused deductions, if they do not deduct RRSP contributions from their total income in the current year. This enables them to reduce their total income in future tax years. If your client expects his or her income to increase significantly in the future, it may make sense to carry forward his or her income tax deductions. Example During 2019, Wade contributed $500 per month to his RRSP. In addition, Wade contributed a lump sum amount of $5,000 on February 15th, 2020. When Wade completes his 2019 tax return, he will be able to claim an RRSP deduction of $11,000, calculated as ($500 x 12) + $5,000. However, Wade could also carry forward a portion or all of his RRSP deduction and use it to reduce his earned income in the future. RRSPs & Tax Deferral The growth of money invested inside an RRSP is not subject to tax until it is withdrawn. In other words, the tax payable on investment growth is deferred until the future. Since income earned inside an RRSP is taxsheltered, RRSP investments grow much faster than non-registered investments held outside an RRSP. When advising your clients about tax deferral strategies, it is essential that you as a Dealing Representative consider your client’s future tax obligations, as well as the tax savings, in order to ensure the best possible return for your clients in the long term. Example Priscilla contributes $10,000 at the beginning of each year to an RRSP account. Her brother, Miguel, contributes $10,000 at the beginning of each year to a non-registered account. Priscilla and Miguel each earn 8% compound interest on their investment. Since Miguel is investing in a non-registered account, he will pay taxes at his marginal tax rate of 40%. The table below shows how much each of them will have saved at the end of various time periods. At the end of: 332 Priscilla’s Registered Account Miguel’s Non-Registered Account Year 1 $10,800 $10,480 Year 5 Year 10 $63,359 $156,455 $57,678 $130,592 Year 20 Year 30 $494,229 $1,223,459 $339,296 $672,832 © 2021 IFSE Institute Canadian Investment Funds Course Since Priscilla’s contributions and investment growth are not taxed until they are withdrawn, she will accumulate a greater amount over time. Priscilla’s investment growth is fully re-invested and accumulates additional growth over and above her regular annual deposits of $10,000. An investment is said to compound when the growth of the investment itself is re-deposited to grow. In addition, Priscilla will receive a tax deduction each year. For example, if Priscilla’s income falls within a 40 percent marginal tax bracket, her $10,000 annual contribution will reduce her taxes payable by $4,000, calculated as $10,000 x 40%. If Priscilla has any remaining RRSP contribution room, she can invest this tax saving in her RRSP. Alternatively, she may invest this amount within a non-registered savings plan. As a result, Priscilla’s RRSP contributions not only provide tax-sheltered growth, but also provide tax deductions that can be used to increase the benefits of investing within an RRSP. Note that Priscilla’s registered account will become taxable upon withdrawal. Given the higher dollar amount in her account as compared to Miguel, she will have a greater tax obligation when she begins withdrawing the funds. Qualified Investments The Income Tax Act restricts the types of investments allowed in RRSPs. Some of the investments that qualify to be held within an RRSP include: cash, guaranteed investment certificates (GICs), term deposits, treasury bills, and other short-term deposits Canada Savings Bonds, Canadian government bonds, and bonds and debentures of corporations listed on an exchange Canadian mortgages and mortgage-backed securities publicly listed stocks traded on a stock exchange mutual funds, exchange-traded funds segregated funds rights, warrants, and call options (if they are covered call options) investment-grade bullion, coins, bars, and certificates royalty and limited partnership units annuities © 2021 IFSE Institute 333 Unit 9: Retirement Types of RRSPs RRSP account types can be categorized as managed, group, self-directed, or spousal. The table below highlights the key differences among the four plan types. For illustration purposes assume Nisha is married to Jesse. Nisha has opened managed and self-directed accounts. She is also a member of her employer’s group RRSP. Jesse has opened a spousal RRSP account. Account Type Managed Group Group Spousal Self-Directed Spousal Contributor Nisha Nisha and/or employer Nisha and/or employer Nisha Nisha Annuitant Nisha Nisha Jessie Nisha Jesse Plan Sponsor Financial Institution Employer Employer Financial Institution Financial Institution Investment Options Limited Limited Limited All Qualified Investments All Qualified Investments With the exception of the Group RRSP, Nisha is the only contributor for all plan types. She is also the annuitant for all plan types except the spousal RRSPs. The plan sponsor is usually the financial institution, except in the case of group RRSP, when it is the employer. With respect to investment options, self-directed and spousal plans are the most flexible since they can hold all qualified investments in a single account. Managed RRSPs Managed RRSPs are the most common type of RRSPs. This type of account is opened in the name of one individual who acts as the contributor and annuitant, also known as the beneficiary. Managed RRSPs typically hold a single type of investment, such as guaranteed investment certificates (GICs), Canada Savings Bonds (CSBs), or mutual funds. Managed RRSPs are usually held and managed by a trustee, often a trust company or bank, and are therefore called managed accounts. Group RRSPs Group RRSPs are a collection of managed RRSPs grouped together for administrative purposes. Group RRSPs are typically sponsored by an employer, union, or professional association. Group RRSPs are administered by a financial institution, securities dealer, or insurance company. The table below summarizes the advantages and disadvantages of group RRSPs. 334 © 2021 IFSE Institute Canadian Investment Funds Course Advantages Disadvantages Since contributions are made from pre-tax payroll deductions, reducing taxable income at the source, the tax benefit is immediate. Employer chooses the plan administrator. Potential for limited investment options. Group RRSPs are transferable to another RRSP if you leave the employer. Withdrawals by the employee during their plan participation may be restricted by the employer. Easier and less costly administration compared to a registered pension plan. Employer contributions are optional. Contributions and withdrawals may be made at any time unless restricted by the employer. Group sponsored plans can offer lower fees as compared to individual plans. Example Tom and Jerry both have a marginal tax rate of 40%. Beginning in January, Tom contributes $1,000 per month to his Managed RRSP through a pre-authorized chequing account (PAC) while Jerry contributes $1,000 per month to a group RRSP. At the end of the tax year, Tom reports a $12,000 RRSP contribution, calculated as 12 x $1,000, on his income tax return. His $12,000 RRSP deduction results in a refund of $4,800, calculated as $12,000 x 40%. Jerry's monthly group RRSP pre-tax payroll deduction of $1,000 reduces his taxes immediately. Every month, Jerry saves $400 in taxes, calculated as $1,000 x 40%, he would have otherwise paid on the $1,000. At the end of the tax year, Jerry has saved $4,800 in taxes, calculated as 12 x $400. Both Tom and Jerry save $4,800 in taxes, but Jerry receives his tax savings throughout the year while Tom must wait until after submitting his tax return to receive his tax savings. Self-Directed RRSPs With a self-directed RRSP, the investor selects from a wide variety of investment options. Unlike a managed account, which may only allow an investor to hold mutual funds offered by the plan sponsor/administrator; a self-directed RRSP allows an investor to mix-and-match any combination of investments, such as stocks, mutual funds, bonds, or investment-grade bullion. Investors can customize the plan to meet their needs. © 2021 IFSE Institute 335 Unit 9: Retirement Self-directed RRSPs still require a trustee, such as a trust company, bank, investment company, or broker that sponsors and administers the plan. Typically, the trustee charges a fee for this service. Spousal RRSPs A spousal RRSP allows one spouse to be the contributor while the other spouse is the annuitant. Historically, spousal RRSPs were set up to allow couples to split their RRSP contribution such that their income at retirement was more evenly balanced. This would have the effect of minimizing their income tax liability. The tax benefit of a spousal RRSP is maximized when the higher income spouse or common-law partner contributes to a spousal RRSP where the lower income spouse or common-law partner is the annuitant. In this case, the higher income individual can claim the RRSP contribution as a tax deduction. Presumably, the lower income individual, who is in a lower tax bracket, will be able to withdraw money at retirement from the spousal RRSP. If the lower income spouse or common-law partner has RRSP contribution room, they can also contribute to a managed RRSP. Example Based on his earned income from last year, Jon can contribute $13,800 to an RRSP this year. His commonlaw partner, Craig, works part-time. As a result, Craig’s maximum RRSP contribution limit is only $4,000. If Jon and Craig each contribute the maximum amount to their RRSP each year, Jon will have saved much more than Craig. The table below displays Jon and Craig’s individual managed RRSP savings assuming they earn a rate of return of 8% compounded annually. After 10 Years Jon's Managed RRSP Craig's Managed RRSP Difference in savings After 20 years After 30 Years $199,915 $631,515 $1,563,308 $57,946 $183,048 $453,133 $141,969 $448,467 $1,110,175 Jon can save a significantly higher amount in his managed RRSP. Under current RRSP legislation, Jon will have to make larger minimum withdrawals than Craig at some point in the future. A spousal RRSP can be set up to split Jon’s contribution so that the couple accumulates a similar total in their respective managed RRSP accounts. 336 © 2021 IFSE Institute Canadian Investment Funds Course Tax Benefits of Contributing to a Spousal RRSP Under Canada’s progressive tax system, spouses or common-law partners with significantly different incomes will benefit financially if they are able to build two pools of savings that will produce two similar income streams during retirement. Under Canada's progressive tax system, they would pay less tax on the two streams of income than if the majority of the RRSP withdrawals were taxed in the higher income earner’s hands. A progressive tax system is defined as a system in which the tax payable on your client’s next dollar of earned income increases as their income increases. In other words, it is better, from an income tax perspective, if a couple earns $50,000 each rather than one person earning $100,000 while the other person earns $0. NOTE: An individual who is over 71 may still contribute to a spousal RRSP if they still have earned income and their spouse (the annuitant of the spousal RRSP) is not yet 71 years of age. Example Jon and Craig decide that a spousal RRSP, where Jon is the contributor and Craig is the annuitant, would be in their best interests. Currently, they contribute a total of $17,800 each year to RRSPs, calculated as $13,800 + $4,000. In order to split their contributions, they will each need to become the annuitant of $8,900, calculated as $17,800 ÷ 2. Craig will continue to contribute $4,000 to a managed RRSP. Jon will contribute $4,900 to a spousal RRSP and $8,900 to a managed RRSP. The table below displays Jon and Craig’s managed and spousal RRSP savings assuming they earn a rate of return of 8% compounded annually. After 10 Years Jon's Managed RRSP After 20 years After 30 Years $128,930 $407,281 $1,008,221 Craig's Managed RRSP $57,946 $183,048 $453,133 Craig's Spousal RRSP $70,984 $224,233 $555,088 $128,930 $407,281 $1,008,221 $0 $0 $0 Craig's Total Difference in savings Spousal RRSP Attribution Rule The Canada Revenue Agency has special attribution rules regarding withdrawals from spousal RRSPs. If your client’s spouse or common-law partner makes a withdrawal from a spousal plan in the year in which they contribute to that spousal plan, or in the preceding two calendar years (also known as 2+ years), the withdrawal is taxed in the contributor’s hands. After that time period, any withdrawals are taxed in the annuitant’s hands. © 2021 IFSE Institute 337 Unit 9: Retirement Example Harvey contributed the following amounts to his wife Patti's spousal RRSP: Year Harvey's Spousal RRSP Contribution 2019 2018 $5,000 $5,000 2017 2016 $6,000 $4,000 In 2020, Patti decides to withdraw $14,000 from her spousal RRSP. Who pays the taxes? Based on the RRSP attribution rule, Harvey would pay tax on $10,000, calculated as $5,000 from his 2019 contribution and $5,000 from his 2018 contribution. Patti would pay tax on the remaining $4,000, calculated as ($14,000 - $10,000). 338 © 2021 IFSE Institute Canadian Investment Funds Course Lesson 3: Withdrawing from RRSPs Introduction Although most of your clients will be saving for retirement, it is important to understand the alternatives available to help them make the right choice when taking money out of their retirement plans. In this lesson you will learn about the options available for withdrawing funds from an RRSP, and the tax implications for each one. This lesson takes approximately 20 minutes to complete. By the end of this lesson, you will be able to: explain the rules for terminating an RRSP explain the options that are available to withdraw from an RRSP and the tax consequences: - lump sum - Home Buyers' Plan (HBP) - Lifelong Learning Plan (LLP) explain the maturity options that are available for RRSP: - lump sum - annuity (life or term) - registered retirement income fund (RRIF) © 2021 IFSE Institute 339 Unit 9: Retirement Terminating an RRSP A registered retirement savings plan (RRSP) can be terminated at any time, provided it is not a locked-in plan. However, the primary purpose of an RRSP is to provide individuals with a tax-deferred retirement savings option using before-tax dollars. Although your client would benefit from allowing their RRSP deposits to earn interest that compounds over many years, they do have the flexibility to withdraw money early and/or wait until the RRSP matures. Your client may decide to withdraw money from their RRSPs before they mature, for any reason. Although a lump sum withdrawal is an option, the federal government has created two programs that allow investors to use RRSP savings to buy a home or to pay for training or education. On the other hand, individuals who decide to maintain some or all of their RRSP deposits must terminate or convert their RRSPs by December 31st of the year in which they turn age 71. Example Victor was born on January 31, 1991. From an early age, his parents have taught him that saving money for his future is an important goal. Since he began working at age 14, Victor has made regular deposits to an RRSP account at a local bank. Victor expects that he will always use his RRSP account to save for his future retirement. He will be able to maintain and deposit money into his RRSP account until the end of the year in which he turns age 71. Since Victor turns 71 in 2062, he will be able to make deposits until December 31st, 2062. By that date, he must convert his RRSP to a RRIF. Lump Sum RRSP Withdrawals All money withdrawn from an RRSP is subject to income tax. The Canada Revenue Agency requires that the financial institution that sponsors the RRSP apply a withholding tax before any funds are deposited into a person’s bank account. As per the table below, the amount of the tax depends on the amount withdrawn and the province of residence. Withdrawal Amount All of Canada (except Quebec) Quebec* From $0 to $5,000 10% 20% From $5,001 to $15,000 20% 25% Greater than $15,000 30% 30% * For Quebec residents the withholding tax is equal to Quebec withholding tax of 15% for all withdrawal amounts plus federal withholding tax of 5%, 10% and 15% for the brackets indicated above. 340 © 2021 IFSE Institute Canadian Investment Funds Course Example Yasmine lives in Ontario. Her finished basement was badly damaged in a flood. She did not have homeowner’s insurance and the basement repair bill is estimated at $12,000. Yasmine has no savings other than her RRSP. In order to fix her basement, she decides that she has no choice but to withdraw money from her RRSP. However, in order to get the $12,000 she needs now, she must withdraw enough to also cover the withholding tax. Yasmine must withdraw $15,000, calculated as $12,000 ÷ (1 – withdrawal rate of 20%). The gross amount that Yasmine withdrew from her RRSP is then added to her annual taxable income, and the 20% tax deducted ($3,000) will be added to the tax she has paid. If the $15,000 pushes Yasmine into a higher tax bracket, and her marginal tax rate becomes higher than 20%, she may owe more taxes during income tax time. Home Buyer’s Plan (HBP) Withdrawals The Home Buyer’s Plan (HBP) allows individuals to make tax-free withdrawals from their RRSPs in order to purchase a principal residence. An individual can withdraw up to $35,000 from their RRSP under the HBP for any qualified withdrawal made after March 19th, 2019. Prior to this date, maximum withdrawals were $25,000. Before participating in the HBP, the individual must have entered into a written agreement to buy or build a qualifying home. They must complete the transaction by October 1st of the year after the withdrawal. If they buy the qualifying home together with their spouse or common-law partner, or other individuals, each person can withdraw up to $35,000. To qualify as a first-time homebuyer, the individual must not have owned and lived in a home as their principal residence in any of the four calendar years prior to the year of withdrawal. Furthermore, the individual must not have occupied a home that their current spouse or common-law partner owns. In order to maintain the tax-free status of the withdrawals, the money withdrawn must be repaid into the individual’s RRSP account. The repayment period begins in the second year after the year of withdrawal. Repayments must be made in equal annual installments; and repayments made within 60 days after the calendar year end qualify as repayment for the previous year. In general, the amount of the repayment is 1/15 of the total amount withdrawn. Any missed or incomplete payments are considered income by the Canada Revenue Agency (CRA) and subject to tax. Repayments in excess of the minimum are allowed. The HBP is not available for RRIFs, or any locked-in accounts such as LIRAs, LIFs, RLIFs, LRIFs, or PRIFs. © 2021 IFSE Institute 341 Unit 9: Retirement Example Adam and Joanna were married in 2020 and are looking forward to purchasing a new home together. Since Adam had owned a home as a principal residence the year prior to getting married, he is not eligible for the HBP program. However, Joanna has never owned a home and did not live with Adam in his home during the period he owned it. She is, therefore, able to withdraw the full $35,000 from her RRSP. If Joanna withdrew funds some time during 2020, they must acquire a home by October 1, 2021. Joanna can make her first annual repayment for the 2022 calendar year any time before March 1, 2023. The amount of her repayment will be 1/15 of $35,000, or $2,333.33. Lifelong Learning Plan (LLP) Withdrawals The Lifelong Learning Plan (LLP) allows individuals to make tax-free withdrawals from their RRSPs in order to finance full-time training or education for themselves, their spouses or common-law partners. The maximum total withdrawal is $20,000, subject to a yearly maximum of $10,000. In order to qualify for a withdrawal, the student must meet all four conditions: 1. The student has an RRSP. 2. The student is a resident of Canada. 3. The LLP student is enrolled (or has received an offer to enroll before March of the following year): a. as a full-time student; b. in a qualifying educational program; c. at a qualifying educational institution. 4. If you have made an LLP withdrawal in a previous year, your repayment period has not begun. Withdrawals may take place over a period of four calendar years provided the total does not exceed the maximum. In order to maintain the tax-free status of the withdrawals, the money withdrawn must be repaid into your RRSP account within 10 years. Repayments must be made in equal annual installments, and the first repayment must be no later than the earlier of 60 days after the end of: the fifth year following the year of the first withdrawal OR the second year following the last year in which you or your spouse were enrolled on a full-time basis Any missed or incomplete annual repayments are included in your income and subject to tax. 342 © 2021 IFSE Institute Canadian Investment Funds Course Example Keith has decided to return to school and withdrew $10,000 in 2019 for his accelerated program. Keith is a qualifying student up to the end of tax year 2019. Keith’s repayment period would begin in 2021, and his payments would be calculated as $10,000 / 10 years = $1,000 per year. RRSP Maturity Options Investors must terminate, or convert, matured RRSP by December 31st of the year in which they turn age 71. In that year, they must choose among the following four options for their RRSPs: withdraw the funds as a lump sum purchase a registered life annuity purchase a registered term annuity transfer the RRSP funds to a registered retirement income fund (RRIF) Recall that all money withdrawn from an RRSP is subject to income tax. If an individual takes a lump sum withdrawal of his or her entire RRSP, taxes are due immediately on the full amount. From a tax perspective, it is better to spread out the tax effect by purchasing an annuity or transferring RRSP funds to a RRIF. In addition, the options listed above are not mutually exclusive, so investors can customize their matured RRSP options to suit their lifestyle needs. Potential OAS and other benefit claw backs should also be considered whenever making withdrawals. Registered Annuities A matured RRSP can be used to purchase a registered life annuity or a registered term certain annuity. A registered life annuity provides a lifelong, steady stream of income to the annuitant, the main advantage being that the annuitant cannot outlive his or her retirement income payments. On the other hand, once an investor purchases a registered life annuity, they no longer have control over the investments. As a result, they must be prepared to make decisions with respect to the registered life annuity at the time of purchase. The table below lists some of the decisions that the annuitant must consider. Decision Required Key Considerations How frequently do I want to be paid? Should I take payments monthly, quarterly, or some other frequency? Should I purchase a joint-life annuity? Does the annuity need to provide an income for me and my spouse, or just myself? © 2021 IFSE Institute 343 Unit 9: Retirement Decision Required Key Considerations Should my annuity payments be indexed for inflation? Does my income need to be protected against the effects of inflation? By how much does an indexed payment lower the amount that I will receive now? For how long should my annuity payments be guaranteed, if at all? By how much does a guarantee period of 5 to 25 years lower the amount that I will receive now? When should I begin to receive annuity payments? Do I have other sources of retirement income that will allow me to defer my annuity payments to the future? How much should the joint annuitant receive after the death of the primary annuitant? Should the joint annuitant receive 100%, 60%, or some other amount, of what the primary annuitant was receiving? A registered term certain annuity provides a steady stream of income to the annuitant for a specified number of years. For example, a 10-year term certain annuity provides income payments for 10 years. The main disadvantage of this type of annuity is that an individual can outlive his or her retirement income payments. Other Considerations for Registered Annuities The value of the annuitant’s RRSPs, the annuitant’s age, sex, and health, and the current interest rate offered by the financial institution are also important factors in the calculation of a registered life annuity payout. The annuitant’s age, sex, and health are used to estimate how long the insurer will be paying out funds. For example, a younger annuitant would receive lower payments than an older annuitant. Women can expect moderately lower payments than men the same age since women on average live longer than men. Also, an individual with a medical condition, which reduces his or her life expectancy, would qualify for an impaired annuity and receive increased payments. Interest rates are critical since the financial institution buys interestbearing investments to offset its payment obligations to the annuitant. Consequently, annuity rates reflect long-term interest rates. Example Jian and Cui are ready to retire. The couple have both reached age 71 and Cui is considering purchasing a registered life annuity with her $300,000 RRSP. As a female, Cui has a longer life expectancy than her husband, Jian, who does not have any RRSP assets. However, if Cui dies before Jian, she would like him to receive 60% of their joint benefit. The couple would like to better understand the impact on their monthly income of: 1) a single life versus a joint-life annuity, 2) indexing their annuity for inflation, and 3) having a guaranteed period of 15 years. The couple would like to purchase a registered annuity that pays a monthly income starting immediately. The financial institution uses a long-term interest rate of 5% to value its annuity payment obligation. 344 © 2021 IFSE Institute Canadian Investment Funds Course Indexing? 15-Year Guaranteed Period Single Life Joint Life No No $2,368 $2,192 Yes Yes $1,734 $1,687 Yes No $2,009 $1,846 No Yes $2,054 $2,009 If Cui wants to maximize her personal monthly registered life annuity income, she should choose a single life, non-indexed annuity with no guaranteed period. On the other hand, a joint life, indexed annuity with a 15-year guarantee period ensures that Jian will receive benefits if he lives longer than Cui, their income will keep pace with inflation, and they will receive 15 years of income. Registered Retirement Income Fund (RRIF) A registered retirement income fund (RRIF) is essentially a mirror of an RRSP. Whereas an RRSP is used to save money for retirement, a RRIF is used to withdraw the money accumulated as a retirement income payment. A RRIF can hold the same qualified investments as an RRSP. Like an RRSP, the growth of your investments in a RRIF is tax-sheltered and you control the investment decisions. The major differences between an RRSP and a RRIF are that: 1) a RRIF must distribute assets in the form of a retirement income, and 2) contributions to a RRIF are not allowed. Once an individual transfers their RRSP to a RRIF, they must withdraw a minimum amount each year. In the initial year of a RRIF, the individual is not required to withdraw a payment. When a RRIF is established, the annual minimum can be based on the annuitants age, or his or her spouses age. Once this designation is made it cannot be changed except by transferring to a new RRIF. They may delay the withdrawal until the following year. The amount of the minimum withdrawal is based on the RRIF balance as of December 31st of the previous year and age of the annuitant or their spouse, depending on how it was established. While there is no minimum age for starting a RRIF, an individual can postpone establishing one until the end of the year in which they turn 71. In some cases, additional or off-schedule withdrawals may be permitted. Since there is no maximum withdrawal limit, individuals are free to withdraw any amount they wish. However, RRIF payments are taxable and must be recorded as income on their income tax returns. © 2021 IFSE Institute 345 Unit 9: Retirement Example Dag, age 71, transferred all his RRSP assets to a RRIF in November 2020 through an in-kind contribution. On December 31st, 2020, the market value of his RRIF assets was $400,000. Dag must make a minimum withdrawal from his RRIF by December 31st, 2021. The amount of his withdrawal will be based on the $400,000 market value established at the end of the previous year and his current age of 72. Qualifying versus Non-Qualifying RRIFs Prior to age 71, the minimum withdrawal from a RRIF is determined as follows: Minimum Withdrawal = Market Value of RRIF Assets ÷ (90 - Age) As of 71 years old the minimum withdrawal from a RRIF is determined as follows: Minimum Withdrawal = Market Value of RRIF Assets x RRIF Factor Starting at age 71, the minimum withdrawal required depends on whether the RRIF is a qualifying or nonqualifying RRIF. A qualifying RRIF is one that must have been set up in 1992 or earlier, and that contains no assets transferred or contributed to it at any time after the end of 1992 except from another qualifying RRIF. All other RRIFs are non-qualifying RRIFs. For age 71, withdrawals from a qualifying RRIF are lower than those from a non-qualifying RRIF. For all other ages, the withdrawals are the same. The table below summarizes the age and corresponding RRIF Factor for each type of RRIF. 346 Age Non-Qualified RRIF Factor Qualified RRIF Factor (Established Pre-1993) 70 1 / (90-age) 1 / (90-age) 71 0.0528 1 / (90-age) 72 0.0540 0.0540 73 0.0553 0.0553 74 0.0567 0.0567 75 0.0582 0.0582 76 0.0598 0.0598 77 0.0617 0.0617 © 2021 IFSE Institute Canadian Investment Funds Course Age Non-Qualified RRIF Factor Qualified RRIF Factor (Established Pre-1993) 78 0.0636 0.0636 79 0.0658 0.0658 80 0.0682 0.0682 81 0.0708 0.0708 82 0.0738 0.0738 83 0.0771 0.0771 84 0.0808 0.0808 85 0.0851 0.0851 86 0.0899 0.0899 87 0.0955 0.0955 88 0.1021 0.1021 89 0.1099 0.1099 90 0.1192 0.1192 91 0.1306 0.1306 92 0.1449 0.1449 93 0.1634 0.1634 94 0.1879 0.1879 95 and up 0.2000 0.2000 Example Sue transferred her RRSP assets to a RRIF in 2020. On December 31st of that year, Sue’s RRIF assets had a market value of $300,000. Sue is 72 years old. Her minimum RRIF withdrawal for this year would be $16,200, calculated as $300,000 x 0.0540. Transfers to Annuity or RRIF The decision to transfer matured RRSP assets to an annuity or a RRIF is not simple. Both options offer several advantages and disadvantages. The table below highlights the main differences and similarities. © 2021 IFSE Institute 347 Unit 9: Retirement Single Life Annuity Term Annuity RRIF Am I guaranteed to receive a lifetime income? Yes No No Do I maintain control over my assets? No No Yes Do I have control over my investment options? No No Yes Can I run out of money before I die? No Yes Depends on performance of investments. Will my income increase with inflation? Only if you specify an indexed annuity payment when you purchase the annuity. Only if you specify an indexed annuity payment when you purchase the annuity. Depends on performance of investments. Can you increase your withdrawals? No No Yes Can I convert my life annuity to a RRIF? No No Not applicable Can I convert my RRIF to a life annuity? Not applicable Not applicable Yes Death Considerations for Transfers to Annuity or RRIF The table below highlights the main differences and similarities between annuities and RRIFs in cases of death. Single Life Annuity What if I die before reaching my life expectancy? 348 If you die before the end of your guarantee period, payments continue to your estate; otherwise, payments stop. Term Annuity RRIF If you die before the end of the term, a lump sum payment will be made to your estate. The before-tax value of your RRIF may be rolled over to your spouse otherwise, the after-tax value of your RRIF assets transfer to your beneficiaries. Special rules may apply in the case of dependent children. © 2021 IFSE Institute Canadian Investment Funds Course Single Life Annuity Could my spouse receive my annuity payments or RRIF assets if I die first? Only if you specify a joint life annuity when you purchase the annuity. Term Annuity RRIF Only if you die Yes before the end of the term and you name your spouse as your beneficiary. Example Derek’s spouse Laura had a 15-year term annuity policy at the time of her death, with 5 years left. Because there was 5 years remaining on Laura’s term annuity, the lump sum calculation of the remaining balance of the annuity will be paid to Laura’s estate. © 2021 IFSE Institute 349 Unit 9: Retirement Lesson 4: Locked-In Accounts Introduction Locked-in RRSPs (LRSPs) and Locked-in Retirement Accounts (LIRAs) provide a vehicle that enables employees who leave a company with pension benefits to transfer the funds. In this lesson, you will learn about LRSPs and LIRAs, and the rules surrounding them. This lesson takes approximately 10 minutes to complete. By the end of this lesson, you will be able to: discuss why monies are required to be in locked-in accounts explain locked-in RRSPs (LRSPs) and locked-in retirement accounts (LIRAs) explain locked-in retirement funds (LRIFs) and life income funds (LIFs) 350 © 2021 IFSE Institute Canadian Investment Funds Course Locked-In RRSPs (LRSPs) and Locked-in Retirement Accounts (LIRAs) Recall that a registered pension plan is a benefit program offered by some employers to provide their employees with a pension at retirement. However, some employees will leave their company before retirement. In this case, the employee has several options with respect to their registered pension plan (RPP). Employees could: forfeit the employer contributions, and receive their own contributions plus any investment earnings on those deposits leave their money in the plan and collect a pension from the pension plan when they reach normal retirement age, often defined as age 65 In addition: if the individual’s new employer has an RPP, the employee may be able to transfer his or her money to the new employer’s RPP if the employee is under age 55, they may be able to transfer the pension benefits to a locked-in RRSP (LRSP) or a locked-in retirement account (LIRA) depending on legislation Employees can transfer the money they have contributed to the plan plus any investment earnings on those deposits. In addition, employees will be able to transfer the employer’s deposits plus investment earnings if they have been with the employer for a certain length of time, usually two years. An employee’s right to the employer’s deposits and investment earnings is known as vesting. Vesting refers to the employee’s right to keep any employer contributions made and investment growth earned on behalf of the employee. Benefits from a registered pension plan must be used to provide employees with a retirement income when they reach normal retirement age, defined as age 65. LRSPs and LIRAs are similar to RRSPs, with two key differences. First, deposits to a LRSP or a LIRA can only come from a transfer of RPP assets; Employees cannot make regular contributions to these account types. Second, withdrawals from an LRSP or a LIRA are restricted since pension legislation requires that these account types be used for the sole purpose of providing employees with an income at retirement. Although LIRAs were introduced to replace LRSPs, LRSPs are still available in federal jurisdictions. Otherwise, LIRAs and LRSPs are virtually identical in structure. Life Income Funds (LIFs) and Locked-in Retirement Income Funds (LRIFs) Individuals must convert their LRSP or LIRA by December 31st of the year in which they turn age 71. In that year, they must choose among the following four options for their LRSPs or LIRAs: purchase a registered life annuity © 2021 IFSE Institute 351 Unit 9: Retirement transfer your LRSP or LIRA funds to a life income fund (LIF) transfer your LRSP or LIRA funds to a locked-in retirement income fund (LRIF) transfer your LRSP or LRA funds to a prescribed retirement income fund (PRIF) Recall that withdrawals from an LRSP or a LIRA are restricted since pension legislation requires that these account types be used for the sole purpose of providing individuals with an income at retirement. As such, most of the transfer options mentioned above include a provision that places a maximum limit on the amount that you may withdraw during a calendar year. The PRIF option is the only option where an individual can withdraw the entire account balance at any time. In other words, registered pension plan assets that end up in a PRIF account may be cashed in. Transfer Options LIFs, LRIFs and PRIF The transfer option your client can choose depends on the provincial or federal jurisdiction within which the plan was set up. The table below provides an overview the provincial and federal jurisdictions in which each option is available. Pension Jurisdiction Life Annuity LIF LRIF Alberta British Columbia x x x x x Manitoba x x x New Brunswick x x Newfoundland and Labrador Nova Scotia x x x x x Ontario Prince Edward Island x x x Québec Saskatchewan x x Federal x PRIF x x Notice from the table above that PEI has no locking provision with respect to pension plans. In other words, there is no restriction placed on withdrawal amounts for pension plans that are administered according to the Pension Act in the province of PEI. The calculation for the minimum withdrawal amount that must be made from a LIF, LRIF, or PRIF account is identical to the minimum withdrawal calculation for a non-qualifying RRIF. The maximum withdrawal amount for a LIF or LRIF is determined by the provincial or federal jurisdiction within which the plan was set up. In addition, the maximum withdrawal amount will vary according to the owner’s age, current long-term interest rates, and the previous year’s investment returns for the fund. In some jurisdictions, a LIF must be converted to a life annuity at age 90. 352 © 2021 IFSE Institute Canadian Investment Funds Course Summary Congratulations, you have reached the end of Unit 9: Retirement. In this unit you covered: Lesson 1: Government and Employer Plans Lesson 2: Registered Retirement Savings Plans (RRSPs) Lesson 3: Withdrawing from RRSPs Lesson 4: Locked-In Accounts Now that you have completed these lessons, you are ready to assess your knowledge with a 10-question quiz. To start the quiz, return to the IFSE Landing Page and click on the Unit 9 Quiz button. © 2021 IFSE Institute 353