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Tag: spousal RRSP

  • Single, no pension? Here’s how to plan for retirement in Canada – MoneySense

    Single, no pension? Here’s how to plan for retirement in Canada – MoneySense

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    • Canada Pension Plan (CPP) deferral: CPP deferral is worth considering for any healthy senior in their 60s. If you live well into your 80s, you may collect more pension income than if you start CPP early, even after accounting for the time value of money and the ability to invest the earlier payments or draw down less of your investments. CPP deferral can protect against the risk of living too long, especially for a single retiree, and particularly for women, who tend to live longer than men. CPP can be deferred as late as age 70. The benefit increases by 8.4% per year after age 65, plus an annual inflation adjustment.
    • Old Age Security (OAS) deferral: Like CPP, deferring OAS can be beneficial for seniors who live well into their 80s. One exception is low-income seniors who might qualify for the Guaranteed Income Supplement (GIS) between 65 and 70. Single seniors aged 65 and older, whose income is less than about $22,000, may qualify. OAS can be deferred as late as age 70. The benefit increases by 7.2% per year after age 65, plus an annual inflation adjustment.
    • Annuities: Almost everyone wants a pension, yet almost no one is willing to buy one. You can buy an annuity from a life insurance company using non-registered or registered (ie. RRSP) savings. (What is a non-registered account? How does it work?) Based primarily on your age and resulting life expectancy, an insurer will pay you an immediate or deferred monthly amount for life—even if you live until 110. If interest rates are higher when you buy an annuity, the monthly payment amount may be slightly higher as well. If you don’t have a pension and you want the security of a monthly payment, an annuity can be worth considering. Especially if you’re in good health and are a conservative investor.

    Survivor benefits in Canada

    Most DB pension benefits are payable only to surviving spouses. Some pensions have survivor benefits for children or a guaranteed number of months of payments to an estate.

    A CPP survivor pension can be paid to the spouse or common-law partner of a deceased contributor. Single retirees are somewhat disadvantaged since their children will usually not qualify for a benefit if they die.

    Children’s benefits are only payable if a surviving child is under 18, or if they are attending full-time post-secondary education and are between 18 and 25.

    Advice, accountability and cognitive decline

    One of the challenges everyone faces as they age is making sound financial decisions. Our experience and knowledge may increase as we age but our ability to process complex decisions tends to begin declining before we retire.

    Single seniors don’t have a partner to bounce ideas off, so many may find themselves stressed about retirement and financial planning. And not everyone feels comfortable talking about money with their children and friends, and not everyone has a financial advisor, either. (Use the MoneySense Find a Qualified Advisor Tool to find an advisor near you.)

    Partners, adult children and friends can provide accountability, as well with spending and other financial decisions and keep each other in check.

    A single retiree can certainly be successful, but the challenges they face are different from that of couples.

    For these reasons, being conservative, deferring pensions, considering annuities, seeking financial advice, and proactively planning are all strategies to consider when planning for retirement as a one-person household—especially if you have no pension plan.

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    Jason Heath, CFP

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  • Should you max out your RRSP before converting it to a RRIF? – MoneySense

    Should you max out your RRSP before converting it to a RRIF? – MoneySense

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    I am guessing you have downsized your home to move to a condo and now have money to contribute more to your registered retirement savings plans (RRSPs) as a result. First, we will start with a quick rundown of how RRSP to RRIF conversion works.

    Converting an RRSP to a RRIF

    A registered retirement income fund (RRIF) is the most common withdrawal option for RRSP savings. By December 31 of the year you turn 71, you need to convert your RRSP to a RRIF or buy an annuity from an insurance company. So, the conversion must take place not by his June birthday, Chris, but by December 31, 2025. You have a little more time than you might think.

    A RRIF is like an RRSP in that you can hold cash, guaranteed investment certificates (GICs), stocks, bonds, mutual funds, and exchange traded funds (ETFs). In fact, when you convert your RRSP to a RRIF, the investments can stay the same. The primary difference is you withdraw from it rather than contributing to it. 

    Withdrawing from a RRIF

    RRIFs have minimum withdrawals starting at 5.28% the following year if you convert your account the year you turn 71. This means you have to take at least 5.28% of the December 31 account value from the previous year as a withdrawal. Those withdrawals can be monthly, quarterly or annually, as long as the minimum is withdrawn in full by year’s end. Each year, that minimum percentage rises. 

    There is no maximum withdrawal for a RRIF. Withdrawals are taxable, though. If you are 65 or older, you can split up to 50% of your withdrawal with your spouse by moving anywhere between 0% and 50% to their tax return when you file. You do this to minimize your combined income tax by trying to equalize your incomes.

    You can base your withdrawals on your spouse’s age and if they are younger, the minimum withdrawals are lower. 

    Contributions before you convert

    If you have funds available from your condo downsize, Chris, you could contribute to your husband’s RRSP. He can contribute until December 31, 2025. If you are younger than him, he can even contribute to a spousal RRSP in your name until December 31 of the year you turn 71, whereby he gets to claim the deductions, but the account belongs to you with future withdrawals made by you.

    However, just because you have money to contribute, it doesn’t mean you should. Say your husband has $10,000 of RRSP room and his taxable income from Canada Pension Plan (CPP), Old Age Security (OAS), investments, and other sources is $50,000. He could contribute and deduct that $10,000 to reduce his taxable income to $40,000. In most provinces, the tax savings would be about 20%. His tax refund would be about $2,000.

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    Jason Heath, CFP

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  • How to cope with the RRSP-to-RRIF deadline in your early 70s – MoneySense

    How to cope with the RRSP-to-RRIF deadline in your early 70s – MoneySense

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    Unless taxpayers make a request, there are no withholding taxes on the minimum RRIF withdrawal. This can result in the Canada Revenue Agency (CRA) requesting quarterly tax installments in the future: after filing a tax return where net taxes owing (taxes owing less the taxes deducted at source) exceed $3,000. 

    If this looks to be an annual event, it’s wise to pay the tax installments, as the CRA will charge installment interest on the amounts outstanding or paid late, Ardrey says. “That rate of interest is currently at 10%.” 

    (Of course, if you overpay installments, the CRA will not pay you any interest.)

    Withholding taxes is another consideration. These are not the same as your final tax bill (after you die), Birenbaum says, but instead are “a default percentage the government takes upfront to ensure they get (at least some) tax on RRSP or RRIF withdrawals.” If you’re in your 60s and have ever taken money from your RRSP, you know you pay 10% withholding tax for withdrawals of $5,000 or less, 20% between $5,001 and $15,000, and 30% over $15,000. Amounts are higher in Quebec.

    But the rules are different for RRIFs; there are no withholding taxes required on minimum withdrawals. Outside Quebec, withholding taxes are the same for RRSPs, says Birenbaum. For systematic withdrawals, withholding taxes are based not on each individual payment but on the total sum requested in the year that exceeds the minimum mandated withdrawal. 

    You don’t necessarily want to pay the least in withholding taxes, as many may know from making RRSP withdrawals in their 60s. You can always request paying a higher upfront withholding tax on RRIF withdrawals, if you expect to owe more at tax-filing time due to other pension and investment income. You can also set aside some RRIF proceeds in a savings account dedicated to future tax liabilities. 

    Do RRIFs trigger OAS clawbacks?

    Another complication of extra RRIF income is that it can trigger clawbacks of Old Age Security (OAS) benefits. If your total income exceeds $90,997, OAS payments will be clawed back by $0.15 for every dollar over this amount until they reach zero.  

    Income splitting with a RRIF

    Fortunately, there are ways to minimize these tax consequences. If you are one half of a couple, you can benefit from a form of pension income splitting: RRIF income can be split with a spouse on a tax return when appropriate, providing the taxpayer is over 65. An income split of $2,000 can provide a pension tax credit for the spouse, which could be the difference between being impacted by the OAS clawback or not.

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    Jonathan Chevreau

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  • Married with money: How to combine finances with your partner – MoneySense

    Married with money: How to combine finances with your partner – MoneySense

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    Whether you’re planning to cohabitate or you’re already living together and are starting to plan financial goals, here are some tips on bringing your money together.

    Talk about money with your partner early

    Whether you’re married or not, it’s important to understand your partner’s financial situation, goals and values. Feelings about money formed during childhood often influence us as adults—for instance, fear of not having enough, discomfort with debt, or family taboos around talking about money. Even without these money hang-ups, everyday spending and saving can be stressful when you’re combining finances with another person.

    If you and your partner are moving in together, discuss how you’ll split household costs. Will regular expenses like rent or mortgage payments, utilities, home insurance, groceries and internet be shared equally or in proportion to your respective income levels? If either of you has children, will you share daycare and other child-rearing costs?

    Once you’ve covered everyday expenses and how to track them, consider how you’ll deal with the unexpected. Will you both contribute to an emergency fund? What about big-ticket surprises like a broken appliance or leaky roof? How will you handle it if one person wants the cheapest solution while the other prefers paying more for quality or prestige?

    Then discuss how much to budget for discretionary items like restaurant meals, vacations, recreation and entertainment. Is everything shared, or does each partner get to spend their own “fun money” after financial obligations are covered?

    Every couple is different, but for these and other money matters, clear, open and honest communication is vital to avoid conflicts and resentment down the road. Don’t wait until you face major events like buying a home or dealing with one partner’s sudden unemployment to start discussing your finances openly.

    Sharing your life—and your debt

    Legally, each person remains responsible for their own bank accounts, loans and credit card debt. But if you’re planning a life together, reducing your combined debt creates a stronger financial foundation. Helping your partner pay their debt will also improve their credit score, which may benefit you both in the future, when you need to finance major purchases like a home. Talk about how you’ll manage debt together. Will you help each other pay off existing obligations like credit card balances or student loans?

    If you choose to keep debts separate, be aware that if your partner is behind on loan payments, the lender may seek permission to make a claim on jointly held assets—including your home.

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    Stephanie Griffiths

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