You can continue to contribute to your RRSP until you turn 71 if you have contribution room or have any employment income. RRSP contribution deductions lower your taxable income. Income from non-registered investments is treated differently at tax time. When a greater portion of your investment income falls in the taxable category, your total income may be pushed over the OAS-clawback income threshold. If you have a younger spouse, consider using their age to calculate your minimum RRIF payments.
This will lower the mandatory minimum annual withdrawal requirement and lower your overall net income for OAS calculations. For more OAS-clawback reduction strategies, click here. In addition to the universal OAS pension, there are three other benefits under the OAS that low-income seniors may also qualify for. They are the:. The GIS is a monthly benefit available to seniors who have a low income and are living in Canada.
Over 1. The amount of GIS benefit you qualify for is dependent on your income level and marital status. For couples, the combined annual net income is utilized to calculate the guaranteed income supplement amount.
The table above shows that for the third quarter of , you are eligible to receive GIS if you are:. GIS benefit amounts and income levels are updated on a quarterly basis using the Consumer Price Index.
For subsequent years, once you file an income tax return, your eligibility for GIS will be assessed automatically.
The Allowance is one of the supplementary monthly benefits available through the OAS program to low-income individuals who are the spouse or common-law partner of someone who is receiving the GIS. Like the GIS, the Allowance is also a non-taxable benefit. You will stop receiving Allowance benefits the month after your 65th birthday. You must apply in writing if you want to receive the Allowance, and your application can be sent in starting from the month after your 59th birthday.
This is the third supplemental benefit under the OAS program. It is a non-taxable benefit available to low-income seniors between the ages of 60 and 64 whose spouse or common-law partner has died. The application for this benefit is similar to that for the Allowance. You must apply in writing and can send in your application the month after your 59th birthday.
Your eligibility for the benefit in subsequent years is assessed automatically based on your income tax return. If you have questions regarding your eligibility for any of the Old Age Security benefits, you can contact Service Canada at You can also download application forms for the Guaranteed Income Supplement, Allowance, and Allowance for the Survivor here.
The second major source of retirement income available to eligible seniors and their families is from the Canada Pension Plan CPP. The amount you receive is based on what you have contributed to the plan during your working years and for how long you made those contributions.
Since established in , the CPP has undergone several changes and there are more significant changes on the horizon. About 6. The contribution rate is 4. CPP contributions are required from age 18 but are no longer required after you start receiving CPP benefits or turn Your monthly CPP pension payment will depend on how many years you worked and contributed and your average salary during this time.
Most people will not receive the maximum amount either because:. More on these later. Your CPP Statement of Contribution will come in handy when utilizing this calculator, and you can obtain it by accessing your My Service Canada account online. You can also obtain this information by calling Service Canada at The standard age to start collecting CPP benefits is 65 years, however, you can choose to start collecting it earlier or delay it till later.
Conversely, if you begin taking your CPP later i. Factors that you should take into consideration include your:. General drop-out provision : Up to 8 years of your lowest earning years can be dropped when calculating your CPP benefits. This helps to boost the amount of benefits you qualify for if you have had periods of low or no earnings.
Child-rearing provision : In addition to the general drop-out provision, if raising children caused you to stop working or to earn a lower income, the child-rearing provision increases your CPP benefits by excluding this period when calculating your CPP benefits. Pension sharing : Retired and eligible spouses or common-law partners can choose to share their pensions in a way that minimizes tax for both parties.
This works well when one spouse is being taxed at a higher marginal rate. The amount paid under this benefit depends on whether the survivor is receiving other pensions, their age, and the amount of contribution made by the deceased during their lifetime.
So, if you survive more than one spouse, you will be paid whichever benefit is largest. Death benefit : This is a one-time, lump-sum payment made to the estate of the deceased contributor.
The children must be between the ages of 18 and 25 to qualify. As corporate defined benefit pension plans continue to shrink, the Canadian government implemented a plan via bill C to enhance CPP benefits starting in The enhancements will increase the pension amounts seniors receive and also benefits available to survivors. Note that since the CPP is funded by contributions, the expected increases require a simultaneous increase in contributions from employees and their employers.
The contribution rate for employees and employers is expected to increase from the current 4. The same amount will also be contributed by your employer. In summary, the future CPP will pay out a greater pension to seniors.
However, the increase will impact individuals differently depending on how much and how long they make CPP contributions under the new rules. In my opinion, this is probably the most important and and maybe most neglected of the three pillars. Employment pensions refer to workplace plans including defined benefit and defined contribution plans, and individual retirement savings generally refer to the RRSP.
The defined benefit pension plan DBPP is a pension plan where your employer pays you a specific monthly income when you are retired. The pension amount you qualify for is calculated using different methods, but the formula is usually based on your average highest earnings and the number of years of service. You and your employer usually contribute to the plan and the funds are then invested in a pension fund. Your employer bears all the investment risk. Often, the employee is required to contribute a certain percentage of their salary, and the employer matches all or part of this contribution.
Unlike in a defined benefit pension plan, contributions to a defined contribution pension plan DCPP are invested for the individual in their personal pension account where the investments can be tailored by the employee to fit their own investment goals and risk profile. There are no guarantees on what your total payout is going to be, and market returns may or may not have been good. If you prefer to receive scheduled payments instead of a lump-sum amount, you can transfer the funds from your DCP plan to other registered plans.
For both DCPP and DBPP, if you change employers before retirement or before you are 55 years old, there are a few options for what you can do with the commuted value of your pension. The number of employees who are participating in an employer-sponsored pension plan has declined in recent times, and private-sector workers covered by a defined benefit pension are in the minority.
These days, if you are enrolled in any type of workplace pension, you can count yourself lucky! As of today, only 1 of every 3 Canadian workers has a workplace pension.
Of all the investment vehicles available to Canadians for their retirement planning under pillar 3, this is one of the most important. When the RRSP was first established in , the intent was to help workers who were not benefitting from employer-sponsored pension plans to save for retirement. In that same year, contributions to RRSPs totalled For more on these options, click here. Setting up an RRSP account is easy. You can walk into any bank or credit union to have an account set-up.
If you are a daring DIY-type individual, you can also set it up through an online discount brokerage. Documents that will be required include government-issued identification and your Notice of Assessment from CRA to show how much contribution room you have.
Annual limits are placed on the contributions that you can make to your RRSP. There are limits to the contributions you can make to your RRSP. Retiring Allowances to RRSP : If you receive severance pay following retirement, you can transfer the eligible portion of the severance to your RRSP without needing a contribution room.
The non-eligible portion of the retiring allowance can also be contributed to your RRSP or that of a spouse if you have contribution room left. RRSP contribution room that has not been used in any particular year can be carried forward to future years without penalty. You can contribute to an RRSP until the end of the year in which you turn The taxman will penalize you if you make RRSP contributions that exceed what you are allowed to contribute, or if you invest in prohibited or non-qualified investments.
For more on RRSP penalties, click here. Tax deductions : when you contribute to an RRSP, you get to deduct your contributions from your earned income, thus lowering your taxable income. This tax benefit is either immediate or realized at tax-filing time when you get a tax refund consisting of any excess taxes you had paid on your gross income. Tax-sheltered returns : Investment income earned on your RRSP investments are tax-sheltered and will not be taxed until you withdraw funds from your account.
Lower Taxes: Most Canadians will fall into a lower tax bracket in retirement. What this means is that when they start withdrawing funds from their RRSP in retirement, they will likely pay tax at a lower rate than would have been possible at the peak of their earning years. This also applies to other government income-tested benefits. Income splitting between spouses : RRSPs can be used for income splitting between spouses in such a way that benefits both individuals and lowers their combined tax rates in retirement.
This works especially well if one spouse is in a significantly higher tax bracket than the other spouse. If you are still alive at 71 years of age, the government will come for your RRSP. Okay, scratch that! Not really, but you will be required to shut down your RRSP account and do one of four things with it:. Also, at this age, you are no longer allowed to contribute to an RRSP. For greater details on Registered Retirement Income Funds, click here.
An annuity is an insurance product sold by insurance companies, and which pays a guaranteed regular income over an agreed period of time. There are different types of annuities including Term certain, Life, and Joint life, and survivor annuities. You can choose to receive payments on a monthly, quarterly, semi-annual, or annual basis. For more on Annuities and how they work, check out this article.
In general, after an RRSP account holder dies, they are deemed to have cashed out their remaining funds, and the amount shows up on the final tax return of the deceased. In essence, the RRSP account becomes part of the estate.
However, depending on how you set up your account and if you had designated beneficiaries prior to your death, left-over RRSP funds may be treated differently. A few potential scenarios include:. They do not need to have contribution room to effect this transfer. Taxes will be levied when they start withdrawing income from the account and your estate is spared a tax bill on the transferred assets.
Financially Dependent Child or Grandchild : When your financially dependent child or grandchild becomes the beneficiary of your RRSP assets, their options will vary depending on their age and if they are also deemed to be physically or mentally disabled. If they are under 18 years of age, they can buy an annuity that pays them annually until they are 18 years old.
In both cases, the beneficiaries will be required to pay taxes in the future when they receive annuity or disability payments. Adult financially dependent children can also choose to take out the RRSP assets in cash and have the proceeds taxed at their hands, at a presumably lower tax rate than the estate. Charity : if a charity is the beneficiary of your RRSP account, the funds are included on your final tax return, however, it is expected that the charitable donation tax credit received will cancel out any taxes payable on the funds.
There are a few other scenarios and tax treatments possible, for more info, check out this article. In the final part of this guide, I will briefly touch on other tools that are available for your retirement savings, how much you will need for retirement, DIY investing solutions, and more.
There are other options to save and invest for retirement — think non-registered investment accounts and the TFSA! The tax-free savings account is a nifty little tool that should always be resident in your retirement planning toolbox. The TFSA came into effect in and allowed Canadian residents who are 18 years or older an opportunity to invest a specified amount annually tax-free.
Investment income earned on your investment was sheltered from taxes for life. Numbers from Statistics Canada show that From their census, households with a major income earner younger than 35 years or older than 54 years old were more likely to contribute to TFSAs than RRSPs.
Both plans are great for saving and investing. However, there are instances where the TFSA is a better or only option. Scenarios include:. You can maximize your TFSA now and carry your RRSP contribution room forward to future years when your marginal tax is higher and you will get more in tax refunds. However, funds contributed to a TFSA can come from any source. Since withdrawals from your TFSA do not count towards your taxable income, this can lower your overall tax burden, as well as reduce the amount of clawbacks of OAS by the government.
This makes them a great tool for saving towards projects, travel, car purchase, or building up an emergency fund. This leaves the TFSA as a great tool for continuing to invest in a tax-sheltered environment while retired.
A TFSA account can stay open until death. There are two main designations possible:. The value of the account at the time of death is not taxable, however, any income earned on the account on the account between the date of death and date of transfer to the beneficiary is taxable.
The account stays open — they simply replace you as the plan holder and do not need TFSA contribution room to keep the account in place. The third tier of Canada's retirement income system is made up of voluntary pension savings. The Old Age Security OAS program is financed from Government tax revenues and is a means-tested flat-rate pension that is paid to most Canadians aged 65 years and over.
Residents who have lived in Canada for 40 years or more receive a full pension, the amount is then reduced for those who have lived in the country for a shorter period. Residents who receive a full or partial OAS pension and who have little or no other income, can gain an additional monthly benefit in the form of a Guaranteed Income Supplement. It began operating a year later. It is a contributory social insurance program operating in all parts of Canada, except Quebec, which operates the Regime de rentes du Quebec, or the Quebec Pension Plan QPP , a similar plan.
Participation in both is mandatory for all working residents over the age of Recent changes to the CPP have resulted in the pension increasing by a larger percentage if taken after age 65 and decreasing by a larger percentage if taken before age Alterations to contribution rules depending on when an individual starts to withdraw benefits from the CPP have also been made.
The third tier of Canada's retirement income system is made up of voluntary pension savings RPPs.
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