Vol. 10, #12 – September 13, 2018 – ALLAN GOLD’S BLOG
“HAVE ?$ on RRSP$, DPSP$, RPP$ RRIF$, LOOK HERE!”
Fifth blog post of series on Elder Law for seniors and their families, particularly spouses, adult children, caregivers, etc.
BLOG ALERT! We have interrupted the business series to bring you in this space another series, this one on Elder Law, another area of specialization of Attorney Gold.
OPEN LETTER TO READERS FROM A. J. GOLD:
You may or may not know that Elder Law is another area of specialization of mine. Today, I am addressing a big area of concern to everyone, notably money, or as otherwise known, in the parlance of those 50+, Pensions (& Retirement Income). If you’re approaching ‘senior hood’ or already a retiree, I have a few questions for you. 1. “Do you think about your retirement?” 2. “Do you stress over your pensions, be it to be government, company, etc.?” or 3. “Are you concerned about the revenue of an elderly loved one?” If so, you’re in luck. I have written a multi-part blog on topic. Consider it, if you will, something that I call ‘pension education’; or ‘PEN-ED’ for short. The first earlier this month was about company plans, such giving particular emphasis on the problem of pension deficits. The extra one next dealt with making (non-registered) investments to provide for retirement. The second covered governmental plans, particularly focusing on the rules that may lessen your monthly check. And today, I will address registered saving plans, notably the Registered Retirement Savings Plan (RRSP), Deferred Profit Sharing Plan (DPSP), Registered Pension Plan (RPP) and Registered Retirement Income Fund (RRIF), particularly key areas to be addressed quickly. If money is a focus for you, I invite you to continue reading below..
Note. A.J. Gold is the author of the following books:
“Elder Law in Canada*ELIC*” It’s a ground breaking (2,500+ page) legal text, acquired by legal libraries, Bar Associations, and Law Schools. (For testimonials, excerpts etc, please visit www.practitionerspress.com)
“Estate Document Professor* EDP* (Part of the www.45pluslifehandbook.com* series), informing Canadians everywhere about greater estate preparedness, covering: Last will and testament (will); Power of attorney (POA); Advance medical directive (living will); Trust; Organ donation consent; Estate Inventory and Distribution Survey(For testimonials, excerpts etc, please visit www.practitionerspress.com)
A. TOPIC & PROPOSITION: “Pensions & Retirement Income (Part #3): Today, it’s time to address RRSP$, DPSP$, RPP$ and/or RRIF$
If someone raises the subject of Registered Retirement Savings Plans (RRSPs), Deferred Profit Sharing Plans (DPSPs), Registered Pension Plans (RPPs) and/or Registered Retirement Income Funds (RRIFs), it’s likely that many people would demur and say something like: “Let’s cut this short…that’s all in the future, I’ll deal with it later”. Should you see yourself having a similar reaction, I must say: “Pardon my boldness… perhaps insolence, you’re making a large mistake. When it comes to these plans, there are issues that you should consider right now and things that you should do without delay. And since this pertains to pensions & retirement income, such omissions might later cost you big time!” So I ask you: “Did I get your attention?”
A.1 QUOTE(S) OF THE DAY:
Here are several thought provoking quotes.
• Benjamin Franklin: “A penny saved is a penny earned.”
• Scottish Proverb: “Saving a small amount soon builds up to a large amount.”
• Warren Buffett: “Do not save what is left after spending, but spend what is left after saving.”
• Lee Johnson, Creative Retirement for Women: “A written retirement plan provides an evolving foundation of social purpose and direction for personal growth.”(Source: https://www.goodreads.com/quotes/tag/retirement-planning)
(And yes, he/she really did say that!)
B. WHY IS THIS IMPORTANT …TO ME (YOU)?
Calling .all prospective retirees and their families, also pensioners under 71, this is for you!
First, a vast number of people have one or more Registered Retirement Savings Plans (RRSPs), but apart from the deadline at the end of February, and looking at graphs-tables when choosing a fund, many don’t know much about them. This is surprising since RRSPs typically constitute a high proportion of one’s savings and the investments are usually in material amounts. And as a result, today’s decisions in that regard will probably have a large impact on income in retirement. That’s why, I’m sure that you will agree that muddling along is just not good enough.
Second, whilst some people might have heard of a Deferred Profit Sharing Plan (DPSP), it’s a big mystery to a majority thereof. Some may wonder if it’s appropriate for them, and whether it could be valid compliment to their current retirement savings. Of course, knowing is superior to not knowing and the sooner the better. So, wouldn’t it be good to now learn about the DPSP and evaluate if it’s a suitable vehicle, which could help you down the road? If hesitant, I say: “Don’t be afraid. It’s something that may appear big at the outset, but it’s really quite small and easier done than first thought!”
Third, there is the Registered Pension Plan (RPP), also known as an employer-sponsored pension plan, which I covered in an earlier blog. But here’s the rub! It should not be considered in isolation, but rather, in context of these other plans. This is why, I’m raising this topic again here and now. You see, each may have a role to play- the question is what and to what degree? And I don’t think that you can argue with that!
Fourth, when it comes to the Registered Retirement Income Fund (RRIF), while people may know that, later in life, they will likely sign up for one, but they don’t know when and even a little what’s it about. Therefore, I think that it would be helpful in your financial planning to have a quick briefing about the conversion and the year in which it must be done. Am I right?
C. ARGUMENT: FACTS, FIGURES, LEGALITIES & COMMENTARY
Here are the straight facts.
First, we’ll start with definitions. It’s not enough to have a general idea of key words – it’s important to know what they mean …precisely. Here are the essentials.
• “401(k)” (United States): It is “a retirement savings plan sponsored by an employer. It lets workers save and invest a piece of their paycheck before taxes are taken out. Taxes aren’t paid until the money is withdrawn from the account.” (Source: http://guides.wsj.com/personal-finance/retirement/what-is-a-401k/)
• “Deferred profit savings plan”: This is a “Type of deferred compensation plan in which an employee’s shares are held in a trust with other accrued benefits until his or her retirement, in order to qualify for lower rate of income tax. Also called deferred distribution profit sharing plan.” (Source: http://www.businessdictionary.com/definition/deferred-profit-sharing-plan.html)
• “Investments”: “1. an investing or being invested; 2. an outer covering; 3. same as investiture (sense 1); 4. a) the investing of money b) the amount invested c) anything in which money is or may be invested.” (Source: Webster’s New World Dictionary)
• “Mutual fund”: It is “quite simply a collection of stocks, bonds, or other securities owned by a group of investors and managed by a professional investment company.” (Source: https://www.google.com/search?client=firefox-b-1&ei=hDFsW5PrM86IggfuzZ3oAQ&q=mutual+funds&oq=mutual+funds&gs_l=psy-ab.12..0i131i67k1j0i67k1l2j0l2j0i67k1j0j0i67k1j0l2.3270.3270.0.4898.1.1.0.0.0.0.164.164.0j1.1.0….0…1c..64.psy-ab..0.1.162….0.Xodxfl1XZRA)
• “Pension”: “noun: pension; plural noun: pensions 1. a regular payment made during a person’s retirement from an investment fund to which that person or their employer has contributed during their working life.”(Source: https://www.google.com/search?q=pension+definition&ie=utf-8&oe=utf-8&client=firefox-b-1)
• “Registered Pension Plan (RPP)”: This is a plan established by companies to provide pensions to their employees. More precisely, it is “a form of a trust that provides pension benefits for an employee of a company upon retirement. RPPs are registered with the Canada Revenue Agency. The employee and employer, or just the employer make contributions to this retirement plan until the employee leaves the company or retires.” (Source: https://www.investopedia.com/terms/r/rpp.asp)
• “Registered Retirement Income Fund (RRIF)”: It is “a tax-deferred retirement plan under Canadian tax law. Individuals use an RRIF to generate income from the savings accumulated under their Registered Retirement Savings Plan. As with an RRSP, an RRIF account is registered with the Canada Revenue Agency…. Converting from RRSP. The option exists to convert a RRSP into a RRIF anytime on or before an individual reaches their 71st year. Before the end of the year in which an individual turns 71, it is mandatory to either withdraw all funds from a RRSP plan or convert the RRSP to a RRIF or life annuity. If funds are simply withdrawn from a RRSP, the entire amount is fully taxable as ordinary income; one defers this taxation by transferring investments in a RRSP into a RRIF. ” (Source: https://en.wikipedia.org/wiki/Registered_Retirement_Income_Fund)
• “Registered retirement savings plan (RRSP)”: Known as a registered retirement savings plan (RRSP), or retirement savings plan (RSP), it is an individual retirement plan. More precisely, it is “a type of Canadian account for holding savings and investment assets. RRSPs have various tax advantages compared to investing outside of tax-preferred accounts.” (Source: https://en.wikipedia.org/wiki/Registered_Retirement_Savings_Plan)
2. Second, let us address several key notions and/or principles as follows.
• “Balanced Investment Strategy”: It is a “method of portfolio allocation and management, aimed at balancing risk and return. Such portfolios are generally divided equally between equities and fixed-income securities.” (Source: https://www.google.com/search?q=what+kind+of+investor+are+you&ie=utf-8&oe=utf-8&client=firefox-b-1)
• “Capital”: “Wealth in the form of money or other assets owned by a person or organization or available for a purpose such as starting a company or investing…” (Source : https://en.oxforddictionaries.com/definition/capital)
• “Dividend investing”: It is “an investment approach of purchasing stocks that issue dividends in an effort to generate a steady stream of passive income. Companies distribute cash dividends to their shareholders periodically during their fiscal year, but most issue them on a quarterly basis.” (Source: https://www.google.com/search?client=firefox-b-1&ei=xGCWW5OGC9Gv_Qb4u7XYDA&q=dividend+investor+definition&oq=dividend+investor+definition&gs_l=psy-ab.1.0.0i30k1j0i8i30k1.26886.29654.0.32326.5.5.0.0.0.0.104.488.2j3.5.0….0…1.1.64.psy-ab..0.5.478…0i13k1j0i8i13i30k1j35i39k1j0i13i30k1.0.eIIzEQMKCGQ)
• “Growth investing”: It is a “style of investment strategy focused on capital appreciation. Those who follow this style, known as growth investors, invest in companies that exhibit signs of above-average growth, even if the share price appears expensive in terms of metrics such as price-to-earnings or price-to-book ratios.” (Source: https://www.google.com/search?q=what+kind+of+investor+are+you&ie=utf-8&oe=utf-8&client=firefox-b-1)
• “Novice”: He/she is a “…beginner…a person who is new to the circumstances, work, etc., …; beginner; tyro: a novice in politics.”
• “Retail investor”: He/she is one of the “nonprofessional investors who buy and sell securities, mutual funds or ETFs through a brokerage firm or savings account. (Source: Retail Investor – Investopedia https://www.investopedia.com/terms/r/retailinvestor.asp)
• “Risk Profile”: It is an “evaluation of an individual’s willingness and ability to take risks. It can also refer to the threats to which an organization is exposed. A risk profile is important for determining a proper investment asset allocation for a portfolio. Organizations use a risk profile as a way to mitigate potential risks and threats.” (Source: https://www.investopedia.com/terms/r/risk-profile.asp)
• “Sophisticated Investor”: He/she is “a type of investor who is deemed to have sufficient investing experience and knowledge to weigh the risks and merits of an investment opportunity. For certain purposes, net worth and income restrictions must be met before a person can be classified a sophisticated investor.” (Source: https://www.google.com/search?client=firefox-b-1&ei=MhR4W43xF7Ka_Qaw-KTQBg&q=non+sophisticated+investment+strategies&oq=non+sophisticated+investment+strategies&gs_l=psy-ab.3…6544.7334.0.7644.4.4.0.0.0.0.154.420.0j3.3.0….0…1c.1.64.psy-ab..1.2.264…0i13k1j35i39k1.0.pByW2mL1HWE
• “Value Investing”: It is “an investment strategy where stocks are selected that trade for less than their intrinsic values. Value investors actively seek stocks they believe the market has undervalued. Investors who use this strategy believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with a company’s long-term fundamentals, giving an opportunity to profit when the price is deflated.” (Source: https://www.investopedia.com/terms/v/valueinvesting.asp)
Here’s a comment on the world situation: Financial Incentives and Retirement Savings
In the OECD PROJECT ON FINANCIAL INCENTIVES AND RETIREMENT SAVINGS POLICY BRIEF N°1 titled, “Tax treatment of retirement savings in private pension plans across OECD countries”, it is written as follows: “Countries encourage saving for retirement by taxing retirement savings in private pension plans differently than savings in alternative vehicles or offering other financial incentives. About half of OECD and EU countries apply a variant of the “Exempt – Exempt – Taxed” (“EET”) regime to retirement savings, where both contributions and returns on investment are exempted from taxation while benefits are treated as taxable income upon withdrawal. Other tax regimes can also be found, from the “Exempt – Exempt – Exempt” (“EEE”) regime where contributions, returns on investment and pension income are all tax – exempt, to regimes where two out of three flows of income are taxed (Figure 1). In contrast, the “TTE” tax regime usually applies to savings in other vehicles.” (Source: https://www.oecd.org/pensions/Tax-treatment-of-retirement-savings-Policy-Brief-1.pdf)
Here’s a comment on the Canadian situation: Financial Incentives and Retirement Savings
In a document titled, “Retirement Security For Everyone Enhancing Canada’s Pension System”, February 2015, at the start of the Executive Summary, the Public Policy Forum wrote: “Within Canada’s relatively well-functioning pension system, a series of significant cracks have appeared that are leaving specific demographic groups unprepared for retirement. More than any other subset of the population, a portion of middle-income earners, private sector employees and young Canadians are more likely to experience a declining standard of living in their post-work lives. For these “at-risk groups,” government programs such as the Canada Pension Plan, Old Age Security and Guaranteed Income Supplement will be inadequate in providing sufficient income replacement. Access to inherited wealth is limited. And, in many cases, workplace pension plans are unavailable or not fully utilized. Together, these trends suggest that our country faces a looming retirement challenge for a significant minority of Canadians.” (Source: https://www.morneaushepell.com/sites/default/files/documents/3351-canadas-public-policy-forum/9012/retirementsecurityforeveryone-finalreport-28.01.15.pdf).
Here’s the scoop on several key topics regarding subject of Canada’s retirement savings in private pension plans, such as the Registered Retirement Savings Plan (RRSP), Deferred Profit Sharing Plan (DPSP), Registered Pension Plan (RPP) and Registered Retirement Income Fund (RRIF).
Flexible retirement. You might think that you know the definition. But, just to make sure, kindly note that it’s “the ability to draw a pension – full or partial – while continuing in paid work, often with reduced working hours, or to choose when to retire.” (Source: https://www.oecd-ilibrary.org/docserver/pension_glance-2017-3-en.pdf?expires=1530057353&id=id&accname=guest&checksum=2F2BF54D300C5ED1936358DA688F67DB). This means: (a) That retirement age is not mandatory. Instead, you can select the date of your exit from the workplace; (b) That even if you’re beyond 65, you can continue working either full or part time; and (c) That although earning a salary, you are able to start receiving the pension, either in full or in part, to which you are entitled; (d) That by waiting to take up your pension, and topping off your contributions, you could increase the ultimate benefit. In other words, you have choices. If your circumstances are such that you don’t need the money now, you can continue on working. And this delay could increase the monthly retirement check afterwards. In the alternative, by cutting down your work days or hours, you can move to an intermediate stage when you can supplement your wages by opting to collect benefits. And all of this is important because it gives you the ability to plan when you can leave and take retirement. And for your information, retiring often can be a very good thing!
RRSP & taxes. RRSPs and taxes are close bedfellows. Of course, when you invest in an RRSP, you are providing for your retirement in the long term. But in addition, you’re gaining a short term advantage, in and by saving on your taxes, this usually in the current year. Here’s more respecting this relationship.
o RRSP limits. You cannot just load up your RRSP to the Nth degree. “Your RRSP contribution limit for 2018 is 18% of earned income you reported on your tax return in the previous year, up to a maximum of $26,230. For 2017, the upper limit was $ 26,010. If you have a company pension plan, your RRSP contribution limit is reduced … Unused contributions are carried forward each year, so if you didn’t maximize your RRSPs last year, the unused amounts are added to this year’s limit.” (Source: https://www.google.com/search?client=firefox-b-1&ei=bDSNW87hIca7ggecyI7YBA&q=rrsp+limits+2018&oq=rrsp+limits&gs_l=psy-ab.1.1.0l5j0i22i30k1l5.1231756.1234988.0.1238632.12.10.0.2.2.0.112.850.6j3.10.0….0…1c.1.64.psy-ab..0.12.1104.6..35i39k1j0i67k1j0i131k1j0i20i263k1.222.GF01LzgkjOA)
o Company Pension Rollover. RRSP has a role to play relative to company pensions. This is because you may transfer them to a RRSP when you leave your employer.
o RRSP at death. RRSPs are generally fully taxable on death. However, it is possible for spouses (including common-law partners) to leave RRSP assets to one another on death in a way that defers taxes. But this usually requires designation (in the RRSP contract) of the spouse as the sole beneficiary. A further possibility is through a ‘specific’ testamentary bequest (contained in the will) therefore. And even failing that, there may be another way forward. You see, the executors of the deceased must file a joint election with the spouse designating an amount of the deceased’s RRSP to be taxed on the spouse’s return (rather than on the deceased ’s final return) for the year, the funds were paid to the deceased’s estate. Furthermore, to get a deduction against the income inclusion stemming from the joint election, the spouse could make the special RRSP/RRIF contribution, provided it is made in either the year of the RRSP payment to the estate or the first 60 days of the next calendar year.
o RRSP Withdrawal. Should you make a withdrawal from your RRSP, KNOW that the entire amount is fully taxable as ordinary income; and a taxpayer shall receive a T4RSP slip (Relevé 2 in Quebec). Furthermore, BE aware that the financial institution shall immediately withhold the taxes therefrom.
Figures.
In a paper bearing release date of February 13, 2017, titled, “Economic Insights Trends in RRSP Contributions and Pre-retirement Withdrawals, 2000 to 2013, Derek Messacar, Social Analysis and Modelling Division, Statistics Canada, wrote: “Trends in the use of RRSPs and TFSAs“…Chart 1-1 shows the number of RRSP contributors and withdrawers among 25- to 54-year-olds from 2000 to 2013. Several trends are interesting to note. First, the number of contributors declined gradually by approximately 16% over this period, from 5.0 million in 2000 to 4.2 million in 2013. …Second, the number of RRSP withdrawers (total withdrawers) increased over the period, from approximately 0.9 million in 2000 to 1.3 million in 2013. … Third, the slight decline in RRSP use over the last few years coincided with an increase in the number of individuals aged 25 to 54 who contributed to a TFSA, from 2.0 million in 2009 to 3.0 million in 2013….” (Source: https://www150.statcan.gc.ca/n1/pub/11-626-x/11-626-x2016064-eng.htm)
In a piece titled “Younger earners choosing TFSAs, older savers more likely to save in RRSPs, data show”from CBC News · Posted: Sep 13, 2017 11:06 AM ET, CBC wrote: “The census found 35 per cent of Canadians put money in an RRSP in 2015, 30.1 per cent saved in an RPP and 40.4 per cent put cash in a TFSA. That amounted to 65.2 per cent of Canadians contributing something to their retirement in the year. Almost two-thirds of Canadian households are saving for retirement, census data show, despite a national household savings rate that fell to 4.6 per cent in the second quarter of this year.Of 14 million households, 65.2 per cent made a contribution to either a registered pension plan, an RRSP or a tax-free savings account (TFSA) in 2015, Statistics Canada said Wednesday.”(Source: https://www.cbc.ca/news/business/census-canadian-saving-1.4287219)
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