Retirement Planning Strategies                                                   

You will need approximately 70% of your current income during retirement. The following savings programs are key factors in determining the quality of your retirement years:

1.  Registered Retirement Savings Plans (RRSP’s)

A Registered Retirement Savings Plan (RRSP) combines two financial benefits: immediate income tax deductibility  and tax-free compounded earnings growth until withdrawal. The sooner you start via automatic payroll deduction, monthly chequing account transfers or an annual lump sum, the greater your returns over time. Examples of benefits follow:

Immediate Tax Deductibility: The full amount of your allowable annual RRSP contribution is deducted directly from your total income to arrive at taxable income. The amount of RRSP tax savings depends upon your marginal income tax rate (see example below). The higher this is, the higher your tax savings. Thus, in a high earnings year, endeavor to maximize your contributions, including any available carry forwards. Conversely, in a low income year, RRSP tax savings will be diluted, and you should be more conservative in your contribution until your earnings situation improves.    

                                 * Approximate Federal/Provincial rate in B.C.

Tax-Deferred Compounded Earnings: This feature means all RRSP earnings (i.e. capital, income & dividends) appreciate much more  over time versus other taxable investment alternatives. For example, assuming an annual tax- deferred compounded return of 8%, a $3,000 annual RRSP contribution over 20 years significantly outperforms a taxable GIC option. The RRSP investment is worth $148,260 compared to $111,640 for the GIC.

a) RRSP Annual Contribution Limits:

For 2022, your contribution limit is the lesser of 18% of previous year earned income or $29,210 less your pension adjustment (if you belong to a plan), plus any unused contributions carried forward since 1991. You have 60 days after the end of the year to  make a RRSP contribution for the previous year. That means March 1, 2023 is the deadline for the 2022 taxation year.

Example: If you earned $75,000 in your previous year, your 2023 contribution limit is $13,500 ($75,000 x 18%). If you also contributed $8,500 to a company pension plan, your RRSP contribution would then be limited to $5,000 ($13,500 - $8,500).

If you have unused contribution room from 1991 onward (per your Revenue Canada Notice of Assessment T452), you may include this amount to leverage the tax-free compounded earnings feature. Or you may defer unused contributions to future year(s) if more feasible tax wise. RRSP 'catch-up' loans are available to exploit this opportunity.

Spousal RRSP's: If you currently have a Spousal RRSP and your partner has contribution room, you may only contribute to both plans up to your personal limit each year.

Non-registered assets such as stocks, mutual funds, bonds, GIC's may also be transferred to your RRSP. Income producing assets are more suitable to transfer into a tax-sheltered RRSP than equity based assets since the income is taxed at a higher marginal rate than dividends. Equity based asset are deemed to be sold and any capital gains are taxed at transfer. Certain conditions are involved, so check with your advisor first.

Employer-direct contributions to your RRSP administrator via a bonus payment or regular salary deductions may be exempt from income tax withholding deductions...(the income tax is payable at tax time). Only CPP & EI contributions are deducted. If your employer can accommodate this strategy, it may result in significantly higher RRSP contributions and attendant tax advantages for you annually (see example below). Check out  your particular situation with your accountant.

b) Withdrawal Information

Most RRSP withdrawals prior to age 71 are fully taxed as regular income and are subject to an immediate 10% withholding tax on the first $5,000, 20% on the next $10,000 and 30% over $15,000. Additionally, you will pay tax on this income at your marginal rate the following year, and may even jump to a higher tax bracket as a result. 

It is mandatory to convert all of your RRSP's, Registered Pension Plans (RPP's) and Deferred Profit Sharing Plans (DPSP's) assets to a tax sheltered RRIF or an annuity at the end of the year you turn 71 (previously 69). Should you decide to convert to a fixed rate annuity, be aware of the interest rates prevailing at the time of conversion. This is because it may be more advantageous to convert your RRSP into an annuity prior to age 71 if interest rates are high and expected to drop in future.

At death, your RRSP may be rolled over to your partner’s RRSP to avoid taxes, until their death.  A partner is defined as a legal spouse or common-law who live together for at least 12 consecutive months and are the natural  or adoptive parents of the same child. If the RRSP is bequeathed to dependent children or grandchildren in a lump sum , it is taxed in their hands.

Home Buyers' Plan Withdrawals: First-time buyers (or those who haven't owned a home in the previous 5 years) may withdraw up to $35,000 tax-free as a down payment on a new principle residence ($70,000 per couple if both spouses have an RRSP). The principle must be repaid within 15 years and the RRSP must be active for 90 days before the signed purchase agreement.

Lifelong Learning Plan Withdrawals: If returning to school full time, you may withdraw up to $10,000 a year over 4 years to a maximum of $20,000 tax-free from your RRSP. You must repay the money in equal installments over 10 years.

Note: for contributions to be fully deductible that are made to a RRSP in the 89-day period just before a Home Buyer's Plan or Lifelong Learning Plan withdrawal from that RRSP, the value of that RRSP after the withdrawal must be at least equal to those contributions.

Spousal RRSP Withdrawals: You may not withdraw Spousal RRSP funds for at least a 3 year period to be eligible for 'income splitting' at retirement. At death, all RRSP transfers to a surviving spouse are tax-free, but become fully taxable at their demise.

c) Registered Pension Plan Income Splitting

All registered penson plan income may be split between senior partners on their tax returns. This may significantly reduce tax liabilities each year. Individuals under 65 years of age are eligible for Registered Pension Plan (RPP) income splitting. RRSP annuity payments, RRIF and deferred profit sharing payments are eligible for splitting only after an individual turns 65. Couples may average out their combined income rather than most/all income being reported by one spouse with a much higher income and tax rate. Couples who currently earn the same and single filers do not benefit.

Example: If one spouse has registered retirement plan income of $100,000, a couple will pay approximately $4,300 less tax per year if split so that each claims income of $50,000.

2.  Registered Pension Plans (RPP’s)

Your Pension Plan generates a tax-free compounded rate of return benefit and isn't taxable until you retire or leave the company. Normal retirement age for a full pension is 65, but could be based on years of service or a combination of years and service. The normal employer contribution vesting period for employees is two years of participation in the company plan. The two major types of pension plans are Defined Benefit and Defined Contribution as below.

If you leave your company, your pension money must either be transferred to another corporate pension plan or a Locked-In Retirement Account (LIRA) or locked-in RRSP. You may take a deferred pension from the original  company but pay-out will not start until a later date, such as age 65.

You are unable to cash in occasional lump-sums with a LIRA or locked-in RRSP. You must also transfer these funds by age 71 to a Registered Retirement Income Fund (RRIF) or Life Annuity Fund (LIF) or purchase an Annuity. Although locked-in funds may be converted before 65 due to income requirements, it is preferable to retain them until 71 to maximize tax-free growth benefits.

Contact your Plan Administrator for an annual company benefit statement update. This will detail your projected monthly benefits at retirement, and any vested benefits you may have if you leave. 

Pension Plan Type                               Characteristics Defined Benefit Your retirement benefits have been defined in advance and the company pays all plan contributions based on a predetermined formula. For example, for each year’s service, you may receive a certain % of your five highest earning years as an annual pension. Typically, at death, a reduced benefit is provided to your spouse, usually 60% of the original pension. Defined Contribution Usually, a combination of both employee and employer contributions. The company’s contribution is either a flat amount or a % of the employee’s compensation. Retirement benefits are not set in advance and depend upon: how much capital has been contributed on the employee’s behalf; how much the capital has earned;   how large an annuity can be purchased based on interest rates at retirement. Typically, at death, a reduced benefit is provided to your spouse, usually 60% of the original pension. Deferred Profit Sharing The company funds all contributions based on a % of profits. Annual contributions are limited to 18% of your income or 50% of the annual ceiling on retirement contribution. If there are no profits, then no contributions are made.

3.  Tax Free Savings Account (TFSA)

TFSAs allow individuals 18 years of age and over to earn investment income & capital gains tax-free even at withdrawal... you keep everything you earn! Unlike a RRSP, contributions are not tax-deductible.

Investors who have never contributed to a TFSA since the program began in 2009 now have $88,000 in 2023 accumulated contribution room. An increase of $6,500 from 2022. The annual limit is in addition to your RRSP contribution. While not a replacement for RRSPs, TFSAs are an excellent complimentary savings vehicle.

Period	Annual Limit	Period Total	Accumulated Contribution Room
From 2009 to 2012	$5,000	$20,000	$20,000
From 2013 to 2014	$5,500	$11,000	$31,000
2015	$10,000	$10,000	$41,000
2016	$5,500	$5,500	$46,500
2017	$5,500	$5,500	$52,000
2018	$5,500	$5,500	$57,500
2019	$6,000	$6,000	$63,500
2020	$6,000	$6,000	$69,500
2021	$6,000	$6,000	$75,500
2022	$6,000	$6,000	$81,500
2023	$6,500	$6,500	$88,000

Two important TFSA guidelines...

1) More than simply a savings account: Similar to RRSPs, TFSAs are an investment opportunity that can include a variety of vehicles , like equities, bonds and mutual funds.

2) Contribution limits:

  i)   Any unused room may be carried forward from previous years (similar to a RRSP).
  ii)  Accumulated contributions may not exceed the total $88,000 limit for 2023.
 iii) Any money withdrawn from a TFSA is tax-free and the full amount can be re-contributed beginning the following calendar year.

Example: If your accumulated year-end 2022 TFSA contribution amount was $25,000 but you withdrew $5,000 during the year, you may contribute $51,500 maximum in 2023 to reach the $88,000 limit (i.e. 2022 year-end amount of $25,000 + $5,000 withdrawal replacement + $6,500 2023 limit + 51,500 carry forward = the $88,000 limit).

Bottom line: TFSAs provide a higher return on investment than taxable savings accounts. Therefore, a wise strategy is to transfer funds from a taxable savings account into a new TFSA as soon as possible (click here for TFSA benefits calculator).

4.  Government Pension Plans

Canada Pension Plan is a contributory earnings social insurance program designed to replace about 25% of the earnings on which a person's contribution was based. With few exceptions, everyone in Canada over 18 who earns a salary or business income must contribute to the CPP until: i) receiving a retirement pension, ii) reaching 70, even if still working or iii) death. CPP payments are taxable & adjusted annually for inflation. The more you earn and contribute to the CPP over the years, the higher the benefit. 

The average CPP benefit at 65 years of age is approximately $717 monthly (maximum of $1,307) adjusted annually for inflation.

Old Age Security (OAS) provides monthly maximum taxable pension payments currently averaging $615 adjusted quarterly for inflation. Generally, to qualify for a full benefit, you must have turned 65 and have been a Canadian resident for at least 10 years after your 18^th birthday. Other qualifying conditions exist for a full pension. For 2022, payment is reduced if your net income exceeds a threshold of $81,761. Any amount earned above this point is subject to an additional 15% reduction in OAS pension until the OAS completely disappears. For example, if net income was $85,000, the repayment would be $486 ($85,000 - $81,761 x 15%).  

a) When Can I Receive CPP?

Payments commence the month after your 65th birthday, but can start as early as 60 or any time up to 70. There are financial penalties for taking CPP prior to 65 and benefits for taking it after 65.

You and your partner must apply to split the retirement pensions you both earned at least 6 months before starting. If only one of you is a CPP contributor, you can also share that one pension. The overall benefits paid do not increase or decrease with pension sharing. The combined total amount of the two pensions stays the same.

b) Three Different Types of CPP Benefits

Retirement: The current average CPP benefit at age 65 is approximately $717 monthly to a maximum of $1,307 adjusted annually for inflation. Benefits may start at 60, however the payment is reduced by 3/5% for every month prior to age 65 and increased by 7/10% for every month after 65. Example: an individual retiring at 60 would receive an average monthly benefit of $441 (i.e. $689 less 3/5% x 60 months or 36%);   

Disability benefits are for disabled contributors or dependent children. The average monthly benefit is approximately $1,023 (to a maximum of $1,414 monthly), plus an additional $255 for each dependent child. Post retirement, the average monthly payment is reduced to $525.

Survivor benefits include a one time maximum death benefit of $2,500; a monthly CPP pension average of $452 under age 65/$302 for age 65 & over; and dependent child payments averaging $255 monthly.

Disclaimer: Mutual funds are offered through Credential Asset Management Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise stated, mutual fund securities and cash balances are not insured or guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer that insures deposits in credit unions. Their values change frequently and past performance may not be repeated.