Estate Planning - it's never too early

In a recent article in The Toronto Star, Gordon Pape talked about tax efficient investments. Depending on whether your investments generate interest, dividends or capital gains, their tax rates vary. For example, if your income is from Canadian dividends, you could save $157.10 of tax for every $1,000 received, compared to interest income.

As per Wikipedia,

Estate planning is the process of anticipating and arranging for the disposal of an estate during a person's life. Estate planning typically attempts to eliminate uncertainties over the administration of a probate and maximize the value of the estate by reducing taxes and other expenses.

In reality, we should start estate planning early in life, as building your estate is step one of estate planning.

I often get asked by people where they should invest their money - paying off debts, paying off their mortgage, in an RRSP, in a TFSA, in real estate, etc. There is no correct answer, as many factors contribute to estate planning.

From a retirement perspective, your sources of income vary by how flexible they are. That is true based on when you can take the money, the flexibility of taking the money and how tax efficient during both the accumulation and withdrawal phases they are. In order of least to most flexible at retirement, most advisors would itemize them as follows:

1. OAS - money may be claw-backed starting at incomes of $71,492
2. CPP - can be started between age 60 and 70; can be shared by spouses; is considered taxable income
3. Annuity - once started, it continues for life; there may be guarantees; tax rates vary depending on the source of the original funds (e.g. registered or not)
4. Employment Income - is always taxed, but you may be able to decide how much you work and earn; if you are under 65, you may need to pay CPP on this earned income
5. Work Place Pensions - both Defined Benefit and Defined Contribution; can be shared by spouses
6. RRSP - at 71 must be converted to a RRIF or Annuity or cashed in (not recommended); watch the attribution rule for Spousal RRSPs
7. Non-registered investments - you paid tax through the accumulation phase, but they are normally not taxed when you spend the money
8. TFSA - growth is tax free. Current limit if you have not opened an account yet is $36,500; they are normally not taxed when you spend the money

At any stage of life, you want to minimize the amount of tax you pay. You really need to contact a Tax Accountant for complete advice.

4 key retirement planning decisions

I was quoted in this article which appeared in both the Toronto Star and The Waterloo Record.

4 key retirement planning decisions: Roseman

Whether you retire early or late, you will make some big financial decisions. So, plan ahead and think things through.

Whether you retire early or late, you will make some big financial decisions. So, plan ahead and think things through.

By: Ellen Roseman On Your Side, Published on Mon Apr 07 2014

             

Whether you retire early or late, you will make some big financial decisions. Your goal is to turn your government benefits, pensions and savings into a lifetime income.

Let’s go through the decisions one by one.
 

When will you apply for Canada Pension Plan?

You can take CPP retirement benefits starting at age 60 and get a reduced amount. You can take benefits at 65 and get a full amount. Or you can defer benefits after 65 (until 70) and get an enhanced amount.

Service Canada has helpful questions to ask in deciding when to take your CPP retirement benefits.

How will your age affect your monthly payment?

Do you plan on working while receiving your pension?

How long did you make CPP contributions? How much did you put in?

What kind of lifestyle do you want when you retire?

How much do you get? You can find the amounts paid at age 65 at Service Canada’s website: The average payment is $633 a month, while the maximum payment is $1,038.

Related: 4 reasons to take CPP early
 

When will you apply for Old Age Security?

You must be 65 to qualify for an OAS pension. Starting in April 2023, the age of eligibility will increase gradually to age 67. This change will affect people born in 1958 or later.

You have the option of deferring your OAS pension for up to 60 months after the date you become eligible in order to get a higher amount.

You may want to defer OAS if your income is high enough to put you into clawback territory. The government calls it pension recovery tax.

You will have to repay part of your OAS if your income exceeds $71,592 in 2014. You will repay the whole thing if your income is $115,716. (This applies to individual income, not household income.)

How much do you get? The maximum monthly amount for OAS recipients is $551.54 in the current quarter.

You can also get a guaranteed income supplement if your income is low. The threshold is $16,728 including full OAS pension for individuals and $22,080 for couples who are both receiving full OAS pension.
 

When will you convert your RRSPs into income?

Everything you hold in registered retirement savings plans must be cashed in or converted to income by Dec. 31 of the year you turn 71.

You can convert RRSPs to a registered retirement income fund (RRIF) or a life annuity any time. You don’t have to wait until 71.

Once you open your RRIF, you will have to make a minimum withdrawal that grows each year and pay full tax on the withdrawal.

You may want to convert your RRSPs earlier than the deadline and transfer any money not required for daily spending into a tax-free savings account or non-registered investment account.

This strategy can help you get more control of your taxes and avoid being pushed into a higher tax bracket. For retirees, it’s the after-tax income you have to consider, not the pre-tax income.
 

Will you replace your employee benefits?

You may have benefits that are paid for or subsidized by your employer. These include dental, optical, pharmaceutical and chiropractic benefits.

These benefits may be cut back when you retire – or when you turn 65, even if you are still working. Should you get coverage on your own? How much would you pay?

Heather Freed, a certified financial planner, helps guide people through the transition from group benefits to individual insurance.

The cost to replace health and dental benefits for a family is $250 to $350 a month, she says. The cost for a single person is $125 to $175 a month. These are average costs and exclude life insurance and disability benefits.

Before making a decision, there are two important things to know, says Freed. What is the value of your employee benefits? What coverage do you have and how many claims do you make?

If you’re a frequent user of employee benefits, find out if you can convert them to individual policies. The conversion deadline may be tight. So, pay attention and don’t delay.

These decisions can be challenging. Consider their implications carefully and find competent advisers to help you on your journey.

Ellen Roseman writes about personal finance and consumer issues. You can reach her at eroseman@thestar.ca or www.ellenroseman.com

Highlights of the 2012 Federal Budget

The budget will:
• Gradually raise the age of eligibility for Old Age Security from 65 to 67 beginning in 2023.
• Give people the option to voluntarily defer taking your OAS pension, for up to five years, and receive a higher, actuarially adjusted, annual pension as a result.
• Adjust the RDSP to make it easier to open accounts for mentally challenged individuals; permit parents, who save in a Registered Education Savings Plan (RESP) for a child with a severe disability, to transfer investment income earned in an RESP on a tax-free (or “rollover”) basis to a RDSP, provided the plans share a common beneficiary;and to relax the rule to provide greater access to RDSP savings for small withdrawals
• Contain no new taxes or tax increases.
• Eliminate the penny.
• Reform regulation in the resource industry, including amending the Canadian Environmental Protection Act.
• Allow Canadians to claim more goods duty-free at the border. The limit after 24 hours goes from $50 to $200; for 48 hours it goes up to $800.
• Cap EI premium rate increases to 5 cents a year until the fund is balanced again.
• Eliminate 19,200 government jobs over three years, including 600 senior executives and 7,200 through attrition.
• Cut $2.1 billion from the Department of National Defence over the next three years.
• Cut funding to the CBC by 10 per cent over three years totaling $115 million.
• Cut funding to Elections Canada by $7.5 million a year starting in 2012-13.
• Give $5.2 billion over 11 years to the Canadian Coast Guard.
• Provide $450 million for sports facilities in the Greater Toronto Area for the 2015 Pan American and Parapan American Games.
• Tell consumers to complain directly to food companies about product labelling.
• Give $67 million to the National Research Council to refocus on "business-led, industry-relevant research."
• Streamline overall regulatory reviews of major economic projects.
• Provide $275 million to build and renovate schools on reserves.
• Pass legislation to create standards for First Nations education.
• Refund $130 million in application and processing fees to skilled foreign workers stuck in immigration limbo.
• Raise the retirement age of public servants from 60 to 65, for new employees beginning in 2013.
• Increase employee-contribution levels to pension plans for those working in Canadian Forces, RCMP, Public Service Commission and parliamentarians.
• Make the Governor General pay income tax beginning in 2013.
• Shut down the Public Appointments Commission, Assisted Human Reproduction Canada, and the National Round Table on the Environment and the Economy.
• Sell official residences abroad, generating $80 million in revenue.
• Standardize all government emails to one system.
• $205 million over one year for Hiring Credit for Small Business.
• Give $50 million over two years to Youth Employment Strategy.
• Give $150 million over two years on Community Infrastructure Improvement fund
• Give $105 million next year to Via Rail for operational and capital projects.
• Give $101 million over next five years for Esquimalt Graving Dock.
• Give $50 million over two years to protect wildlife at risk.
• Give $8 million to clean up low-level radioactive waste in Port Hope and Clarington, Ont.
• Provide $44 million over two years to the Canadian Grain Commission to reform their funding model.
• Provide $13.5 million over two years to improve pipeline safety.
• Give $35.7 million over two years to improve tanker safety and inspections, emergency preparedness related to oil spills and updated charts for shipping routes.
• Announce a new global commerce strategy in 2013 that sets trade priorities.
• Provide $9.6 million over three years to the RCMP to fight counterfeiting.
• Give $ 99.2 million over three years to help the provinces create permanent flood mitigation measures.
• The Government has found $5.2 billion in ongoing savings from departmental spending or less than two per cent of federal program spending.

If you would like additional information, feel free to email.