Tag Archives: Tax Free Savings Accounts

How much of your savings can you tax shelter?

By Sheryl Smolkin

Saving for retirement or any other important goal like a home purchase or your child’s education is not easy. But if you are able to deduct your annual contributions from taxable income and/or accumulate investment earnings tax-free, the balance in your accounts will accumulate much faster.

Most Canadians have heard about and save in at least one of the following registered accounts: Registered Retirement Savings Plans (RRSPs), pension plans, Tax Free Savings Account (TFSAs) or Registered Educational Savings Plans. But many may not be aware of exactly how much money they can contribute to these programs annually or carry forward to future years.

RRSP/Pension Plan 
In 2014 you can contribute 18% of your income to a defined contribution (DC) pension plan to a maximum of $24,930. RRSP contributions are based on your previous year’s earnings (2013 earnings for 2014 contributions). As result of the one year lag, maximum RRSP contributions for 2014 are $24,270.

In order to contribute up to $2,500/year to the Saskatchewan Pension Plan (SPP), you must have RRSP contribution room. Maximum permissible defined benefit (DB) pension plan contributions are calculated per year of service, and reduce your DC plan or RRSP contribution room.

RRSP and pension plan contributions are tax deductible and the contributions accumulate tax deferred. However, you do not have to take a deduction for RRSP contributions in the year you contribute. You can wait until a later year when your earnings are higher and if you do, the tax savings will be greater.

Unused RRSP contribution room can also be carried forward to use in any future year. And you can still catch up even if you are retired. For example, if you have unused RRSP contribution room from past years and funds are available, contributing to your own or your spouse’s RRSP is allowed up until the end of the year the plan holder turns age 71. However, you cannot contribute to an RRSP for a person (yourself or your spouse) who already turned age 71 in the previous year.

Unlike DB or some DC pension plans (i.e. SPP), funds in your RRSP are not locked in. That means you can take money out at any time subject to paying taxes on the money in the year of withdrawal.  But it is important to remember that once you withdraw money from your RRSP the contribution room will not be restored and you lose the benefit of future compounding on the amount of the withdrawal.

If tax-free withdrawals are made under the RRSP Home Buyers’ Plan or Lifelong Learning Plan, you will eventually be liable for taxes on the money if you do not pay back the principal over a prescribed period.

Tax-Free Savings Account
The TFSA is a flexible, registered savings account that first became available to Canadians in 2009. From 2009 to 2012 maximum annual contributions were $5,000/year. Based on indexation due to inflation, the annual contribution maximum was increased to $5,500 in 2013. 

A TFSA can be used to enhance retirement savings or to accumulate money for other goals. Contributions are not tax-deductible but savings grow tax-free. If you make a withdrawal from your TFSA, the contribution room is restored in the year following the year you take money out. Unused contribution room is also carried forward.

Because withdrawals are tax free and contribution room is restored after a withdrawal, a TFSA can be an ideal place to stash your “emergency funds.” Another benefit of a TFSA is you can continue to make contributions indefinitely, unlike RRSP contributions which must end after age 71.

An additional attractive feature of a TFSA is that neither income earned within the plan nor withdrawals affect eligibility for federal income-tested government benefits and credits such as Old Age Security, the Guaranteed Income Supplement and the Canada Child Tax Benefit.

Also read:
SPP or TFSA?
TFSA or RRSP? Try these five tests 

Registered Educational Savings Plan
A Registered Educational Savings Plan (RESP) is a tax-sheltered plan that can help you save for a child’s post-secondary education. Unlike an RRSP, contributions to an RESP are not tax deductible. However, investment earnings accumulate tax-free in the plan. When money is paid out of the plan it is taxable in the hands of the student, who typically will be in a lower income bracket than the parent or other contributor.

There is no limit on annual RESP contributions but there is a lifetime maximum of $50,000 per child. However, there are annual and lifetime maximums on the Canadian Education Savings Grant (CESG) available for eligible beneficiaries under the age of 18.

The federal CESG matches 20% on the first $2,500 (maximum of $500) contributed annually to an RESP. The maximum total CESG the government will give, up to age 18, is $7,200 per beneficiary. The grant proceeds are invested along with your contributions, further enhancing the benefits of tax-deferred and compound investment growth within your plan.

A $500 Canada Learning Bond (CLB) is also provided for children of families who are entitled to the National Child Benefit Supplement (net family income of $44,701 in 2015) and who are born after December 31, 2003. These children also qualify for CLB instalments of $100 per year until age 15, as long as they continue to receive the National Child Benefit Supplement. The total maximum CLB payable per child is $2,000.

CLBs are allocated to a specific child; unlike CESGs, they cannot be shared with other beneficiaries. There is no requirement to make contributions in order to qualify for the CLB.

Adding it all up
Over the years RRSP/pension savings limits have crept up and with the introduction of TFSAs in 2009, Canadians have another tax-effective way to save. RESPs are particularly attractive vehicles for educational savings as the federal government offers CESG grants and the Canada Learning Bond as further incentives for saving.

Understanding annual savings limits for all of these registered plans will help you to budget and save the maximum affordable amount every year in the most tax-effective way. Any unused savings room that can be carried forward will come in handy as your income increases or if you ever need to tax shelter a lump sum such as the proceeds of a severance package or capital gains on the sale of a property other than your principal residence.

What would you trade for a good pension?

By Sheryl Smolkin

A recent survey of Canadians revealed that whether or not they currently have a workplace pension plan, the majority would gladly trade off other benefits for any retirement savings plan or a better pension plan at work.

These data were collected by the Conference Board of Canada in a June 2014 comprehensive study into the experiences and perspectives of employers and individual Canadians. Conducted with the support of Aon Hewitt and the National Association of Federal Retirees, the study focused on a variety of issues related to workplace and public retirement savings/pension plans and retirement readiness.

Both employers and individual Canadians across the country were polled. The survey of individuals was completed by a panel of 1,656 Canadians aged 18 and over weighted by gender, region and age.

Who have retirement savings/pension plans?

About 57% of the employed survey respondents indicated they have some form of retirement savings/pension plan such as a Group RRSP, a defined benefit plan or a defined contribution plan at work. Thirty-nine percent said they don’t have a workplace plan and a little over four percent of the total number of respondents “did not know” whether they had one or not.

Respondents in the not-for-profit and private sectors were less likely to report having any form of workplace retirement savings or pension plan, while those working in government were most likely to report having plans. Size of organization and union status were also important predictors of whether or not respondents had a workplace retirement/savings/pension plan.

Indeed, unionized workers were over 1.5 times more likely than those not in a unionized position to have workplace plans. And, more employees of large companies with a staff of over 5,000 reported having a retirement savings plan or a pension plan.

Employees with retirement savings/pension plans 

Who would trade benefits for enhanced pensions?
Forty-three percent of men versus only 28% of women said they would likely trade some aspects of their total rewards for a greater employer contribution to their plan. Also of note, women were roughly three times more likely than men to say they “did not know” whether they would trade or not.

Over 40% of those aged 35–44 and 45–54 said they would likely trade some aspects of their total reward package — while only about 30% of those 65 years of age and over said the same thing. Those 25–34 are about equally divided on this question.

As household income rises, so too does the likelihood that Canadians would consider trading some aspects of their total rewards package for a greater employer contribution to their plans.

Private sector employees are more likely than those in other sectors to indicate that they would trade some aspects of their benefits/rewards for a greater contribution into their plan by their employers. That said, it is of interest that over 30% of those in the government sector would also make a trade for a greater retirement savings contribution .

What benefits would they trade?
Employed survey respondents were asked if given the option, how likely they would be to trade parts of their total rewards package (pay, training, benefits, etc.) to receive greater retirement savings plan/pension plan contributions at work.

A significant minority (37%) indicate it is likely they would make a change. Slightly fewer (33%) say it is unlikely. The remainder are on the fence (i.e., they answered that they are neither likely nor unlikely).

Among those who reported that they would make a trade, or who answered in the “neither” category, anywhere from one-third to one-half would trade a specific item for a greater contribution to their retirement plans.

“Training/learning and development opportunities” was the item most likely to be given up. Nearly 56% indicated that they would make this trade-off. Salary increases were least likely to be considered for a trade.

Table 1: Likelihood of trading specific workplace benefits/rewards for greater employer retirement plan contributions

Likely
Training/learning and development opportunities 55%
Incentive pay (bonuses etc.) 48%
Vacation days 23%
Certain health benefits 38%
Salary increases 35%

Totals may not add up to 100% due to rounding. SOURCE: THE CONFERENCE BOARD OF CANADA

Employed Canadians without a retirement savings plan

How many are interested in participating in a workplace retirement savings/pension plan? 
Almost 7 in 10 employed respondents currently without a retirement savings/pension plan would be interested in participating in such a plan if it were offered. Only a small proportion of respondents (16%) were not interested in participating. The remainder (16%) noted they don’t know whether or not they’d participate if they were offered the opportunity.

With 109 mentions, DB plans topped the list of desired plans. TFSAs were a close second and DC plans came in third.

Who would trade benefits for pensions?
Almost 4 in 10 survey respondents without a retirement savings/pension plan indicate they would be willing to trade parts of their total rewards package to receive any form of retirement savings/pension plan from their workplace. One-quarter said they would be unlikely to do so, and the remainder (36%) are sitting on the fence — i.e., they indicate that they would be neither likely nor unlikely to make a trade.

Of interest, this subset of survey respondents shares similar preferences as those who currently have a plan and would trade for an increased contribution to their plans (see Table 1 above). Further, the proportion of each group indicating that they would be likely to make a trade on each of the items listed is almost the same.

For those currently without a plan the list of potential trades and the % stating that they’d be likely to trade the benefit/reward is as follows:

Table 2: Likelihood of employees trading specific workplace benefits/rewards for participation in a retirement savings/pension plan

Likely
Training/learning and development opportunities 56%
Incentive pay (bonuses etc.) 47%
Vacation days 42%
Certain health benefits 38%
Salary increases 31%

Totals may not add up to 100% due to rounding SOURCE: THE CONFERENCE BOARD OF CANADA

What this means

One facet of the current study explored the role of retirement savings/pension plans in attracting and retaining employees. Without fail, survey respondents said the top three items that attracted them to their current employer/workplace and those that keep them there are:

  • The work environment.
  • The type of work done.
  • Work-life balance.

While 65% of those currently employed cite the organization’s retirement savings/pension plan as being important or very important to their attraction, it only ranked 9th out of 12 potential items.

However, these plans moved up in importance as a tool for retention. In fact, 69% of respondents rate retirement savings/pension plans as important/very important—and with this increase, the relative ranking of these plans  moved from 9th place as an attractor to 6th place out of 12 as a means to retain staff.

This suggests that while employees may not be as concerned about the nature of retirement savings/pension plans or even if one is available when they are first hired, it’s one of the factors they consider later on when a recruiter or another company come knocking.

Living to 100: The four keys to longevity

By Sheryl Smolkin

SHUTTERSTOCK
SHUTTERSTOCK

Living to 100: The four keys to longevity” is a fascinating report issued in July 2014 by the BMO Wealth Institute. According to the study, by 2061 it is estimated that there will be more than 78,000 centenarians living in Canada, up from about 6,000 reported in the 2011 census.

If you are a baby boomer on a quest to improve your odds of living longer than previous generations, the research suggests their are four keys to unlock the door to longevity: body, mind, social and financial.

Key 1: The body

Good health is one of the basic elements to achieve long life. A program of healthy eating, exercise and stress reduction can not only reverse the aging process, it may slow down the aging process at the genetic level.

According to the BMO report, other aspects of good health should include:

  • Adequate sleep (7 to 8 hours per night, and naps as needed).
  • Regular stretching and deep breathing to keep your joints flexible and your body oxygenated.
  • Physical activity that includes both high- and low-impact exercise at least 3 times a week.
  • Drink at least 8 glasses of water daily.
  • Generous amounts of dark leafy vegetables, fresh fruits and whole grains in your daily diet.
  • Eliminating or reducing the amount of unhealthy fats, processed sugars and preservatives in your diet.
  • Consuming a moderate amount of alcohol (e.g., just a glass of red wine with dinner).

Key 2: The mind

Living your best life depends on a healthy brain. A recent article cited in the BMO report explores the best ways to improve your brain power for life.[1] This article reveals that functioning to our fullest capacity is directly linked to the health of our brains. The article suggests that you incorporate these four fundamental lifestyle changes to boost your brain power.

  • Cognitive training: Memory, reasoning, and speed-of processing exercises create a winning combination for cognition.
  • Aerobic exercise: People who exercise moderately to vigorously just once a week are 30 percent more likely to maintain their cognitive function than those who do not exercise at all.
  • Don’t smoke: Non-smokers are nearly twice as likely to stay sharp in old age as those who smoke.
  • Maintain social networks: People who work, volunteer and maintain close-knit human bonds are 24% more likely to preserve cognitive function in late life.

The study results revealed that loss of mental ability was the biggest concern that respondents had about living to 100 and beyond.

Key 3: Social

The popularity of personal bucket lists has ignited a passion in seniors to take up new hobbies, write their life stories, or develop new careers. Senior wanderlust knows no boundaries when it comes to fulfilling dreams after raising a family and retiring from a dedicated career.

Study results suggest there are a plethora of new activities respondents are interested in incorporating into their daily lives after retirement. Spending more time on hobbies and starting part-time jobs were both shown to be highly desirable new activities on the list for many survey respondents and this is widely seen as a positive outcome.

Researchers at the Institute of Economic Affairs in the U.K.[2] recently identified a range of substantially negative effects on health after retirement. Their study found retirement to be associated with a significant increase in clinical depression and a decline in self-assessed health. These effects were shown to grow as the number of years people spent in retirement increased.

If you’re looking to boost your level of social interaction, to supplement your income, or are seeking a productive way to fill your time, you may want to consider taking on a part-time job.

Canadians participating in the BMO survey gave the following reasons for working during retirement:

  • 52%: Keep mentally sharp.
  • 46%: To get out of the house
  • 42%: To socialize
  • 40%: To earn money to improve lifestyle
  • 35%: Need the money
  • 32%: To stay physically fit
  • 28%: To do something I like
  • 16%: To learn new skills

Key 4: Financial

Canadians clearly understand that an important component of successful longevity is having a sense of financial security. Although financial security was cited as a lower priority than maintaining a social network of family and friends for the majority of Canadians surveyed, financial security gains importance with age and as personal assets increase over a lifetime.

The BMO Survey results showed that those with the highest income levels expressed the greatest concern over their finances after retirement. The wealthiest plan to preserve their financial security by  enjoying personal pursuits, socializing, exercising and maintaining a healthy lifestyle.

Overall, the majority of survey respondents anticipate the financial impact of health-care expenses to be significant as they age, even with government provided health care. In fact, the Canadians surveyed expected to spend an average of $5,391 a year on out-of-pocket medical costs after the age of 65.

Surprisingly, even with provincial health care coverage – Canadians foresee medical and health costs to be the single largest expense for old age (74%). Other significant expenses include food, clothing and day-to-day essentials (57%) and housing (56%).

Putting aside money in Tax Free Savings Accounts and purchasing Long Term care insurance are suggested ways to defray future retiree medical costs.

A final thought

The compelling findings of the BMO study speak to the need for all of us to have a better overall plan when it comes to the four key components of longevity: body, mind, social and financial.

Many challenges that may arise in our later years can be both anticipated, and properly planned for, by making smart decisions focused on the ultimate goal of successful longevity.

[1] What Is the Best Way To Improve Your Brain Power For Life? Bergland, Christoper. Psychology Today. January 21, 2014. (accessed June 2014).

[2] Work longer, live healthier, Sahlgren GH. Institute of Economic Affairs, May 2013.