“Mind shift” on taxation needed when you enter retirement

Writing in the Sarnia Observer, financial writer Christine Ibbotson notes that taxation – fairly straightforward before you retire – gets a lot more complicated after you retire.

“Managing your taxes during your working years is relatively generic,” she writes. “You maximize your registered retirement savings plan (RRSP) contributions, purchase investments that attract the least tax possible on investment income or buy real estate to increase your net worth.”  The goal with taxes is get them as low as possible, she explains.

It’s a different ball game in retirement, Ibbotson notes.

“As you transition into retirement, the tax planning process shifts onto withdrawing assets, and doing so in the most tax-efficient manner,” she explains. This requires what she calls a minor “mind shift” for most people, the article notes.

“Most are preoccupied with minimizing current taxes each year. But this cannot be at the expense of your long-term objective for maximizing after tax income for your entire retirement (often estimated at 25 to 40 years),” she notes.

For that reason, Ibbotson says retirees need to get a handle on how the various types of income they may receive are taxed.

“There are three main types of taxation to consider: interest income, dividend income, and capital gains. All are taxed differently, so this makes it easier to structure your portfolio more efficiently when you are creating your plan with your advisor,” Ibbotson writes.

“As a general rule you want to place income that is going to be unfavourably taxed, (interest income) into tax-sheltered products such as tax-free savings accounts (TFSAs) or RRSPs. Investment income that generates returns that receive more favourable tax treatments (dividends or capital gains) should be placed in non-registered accounts.”

If you are retiring, it’s critical that you know what your income is from all sources – government retirement benefits, a workplace pension, and “anticipated income” from your own savings. This knowledge can help you to “avoid clawbacks as much as possible,” she explains.

Other tax-saving suggestions from Ibbotson include the ideas of Canada Pension Plan/Quebec Pension Plan “sharing,” splitting employer pension plans for tax purposes with your spouse, and holding on to RRSPs, registered retirement income funds (RRIFs) or locked-in retirement accounts (LIRAs) to maturity. Those age 65 and older in receipt of a pension (including an SPP annuity) will qualify for the federal Pension Income Tax Credit, another little way to save a bit on the tax bill.

“Simply put, paying less tax translates into keeping more money in your pocket, allowing you to enjoy a better quality of life,” she concludes.

This is great advice. Save with SPP can attest to the unexpected complexity of having multiple sources of income in retirement after many years of having only one paycheque. You also have fewer levers to address taxes – while you might be able to contribute to an RRSP or your SPP account, it’s probably only on your earnings from part-time work or consulting. You can ask your pension plan to deduct additional taxes from your monthly cheque if you find you are paying the Canada Revenue Agency every year.

The older you get, the more you talk about taxes with friends and neighbours, and many a decumulation strategy has been mapped out on the back of a golf scorecard after input from the other players!

Wondering how much your Saskatchewan Pension Plan account will total when it’s time to retire? Have a look at SPP’s Wealth Calculator. Plug in your current account balance, your expected annual contributions, years to retirement and the interest rate you expect, and voila – there’s an estimate for you. It’s just another feature for members developed by SPP, who have been building retirement security for 35 years.

Join the Wealthcare Revolution – follow SPP on Facebook!

Although I have continued my encore career as a personal finance journalist since I retired from my corporate job 13 years ago, my husband retired three years ago. As a result, how to draw down income most tax effectively from our registered and non-registered accounts and how to make sure we don’t run out of money has been a hot topic of our discussions.

Eventually, as you phase out of the workforce or retire, you’ll need to convert your retirement savings into retirement income. It must be done by December 31 of the year in which you reach age 71. The funds are also fully taxable if withdrawn in cash. Moving your investments into a registered retirement Income Fund (RRIF) will mean you can continue to tax-shelter all but annual minimum withdrawals. In the Toronto Star, Paul Russel outlined 10 things you need to know about RRIFs.

In a HuffPost article How Much to Withdraw from Retirement Savings Retirement Coach Larry Rosenthal considers the “4 percent rule” – originated in the early 1990s by financial adviser Bill Bengen which says that if you withdraw 4.5% of your retirement savings each year, adjusted for inflation, your money should last 30 years. “When the 4% rule emerged, investment portfolios were earning about 8% annually. Today, they’re generally in the 3 to 4% range,” Rosenthal says. “Now when you want to figure out how much to withdraw annually from your retirement funds, you need to look at three factors: your time horizon, asset allocation mix and – what’s most often overlooked – the potential ups and downs of investment returns during retirement.”

For further insight into whether or not the 4% rule is safe, listen to the podcast (or read the transcript) of the interview I did late last year with Certified Financial Planner Ed Rempel. On his blog Unconventional Wisdom, Ed reviewed his interesting research which reveals that if you want to withdraw 4% a year from your retirement portfolio without running out of money in 30 years of retirement, you need to hold significantly more equities than bonds in your portfolio. He looked back at 146 years of data on stocks, bonds, cash, and inflation to see what would have happened in the past if people retired that year, with each type of portfolio – e.g 100% bonds, 100% stocks plus various other permutations and combinations. 

Retire Happy’s Jim Yih explains in Drawing Income in Retirement that there are five typical sources of retirement income: government benefits, company pension plans, RRSPs, non-RRSP savings and your personal residence. On one extreme, Yih notes that some people live frugally, save for retirement and continue their frugal ways after retirement and end up dying with healthy bank accounts. In contrast, others spend everything they earn and do not save for retirement. Therefore, they may have to make some sacrifices down the road.

Journalist Joel Schlesinger also addressed How best to draw income from your retirement savings for the Globe and Mail. He focused on the tax implications of drawing down money from various types of accounts. Each account may be subject to different levels of taxation, and, consequently, where you hold investments such as stocks, bonds and guaranteed investment certificates (GICs) becomes all the more important. For example, withdrawals from registered accounts – including RRSPs, RRIFs (registered retirement income funds), LIRAs and LIFs (life income funds) – are fully taxable income. Like work pensions, income from RRIFs and LIFs can be split with a spouse to reduce taxation (once plan holders reach 65).

Written by Sheryl Smolkin
	Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.

We have previously blogged about Why you should join SPP and 10 things you need to know about SPP. But joining a pension plan is a serious decision so before you make a commitment, you need answers to as many questions as possible.

Therefore this week we present a series of SPP FAQs (frequently asked questions) that will clarify a number of nuances about the program you may not yet be aware of.

Q: What is the difference between SPP and an RRSP?
A: SPP follows the same income tax rules as an RRSP except that SPP is locked in. Under tax rules contributions to SPP can be used as repayments to the Home Buyers Plan (HBP) and the Lifelong Learning Plan (LLP). However withdrawals are not permitted for this purpose.

Q: How much money can I contribute each year?
A: SPP regulations limit contributions to $6,000/year. Even though the SPP limit is $6,000, there is the potential to have tax receipts totaling greater than $12,000 for a tax year. For example, if you make two $6,000 contributions in the first 60 days of the year, one for 2017 and one for 2018, you will receive tax receipts totaling $12,000 to report on your 2017 tax return.

Q: How do I allow my tax program to accept more than $6,000 in SPP contributions?
A: All tax receipts received for the remainder of 2017 and first 60 days of 2018 must be entered for the 2017 tax year. Some tax programs will not allow more than $6,000 of Saskatchewan Pension Plan (SPP) contributions to be claimed even though members are eligible to claim the full amount made.

Therefore, it is important to always review your income tax return before filing, specifically line 208 of the T1 General, to ensure the full deduction expected is being made. If the full deduction required is not shown on line 208 you will need to make sure that you record your SPP contribution tax receipts the same way you would record a regular RRSP contribution tax receipt. In most programs this means you need to designate your SPP contribution as an RRSP; in other words, do not indicate you have made an SPP contribution.

Q: How much can I transfer in from another registered plan?
A: You can transfer up to $10,000 in cash per calendar year into your SPP account from existing RRSPs, RRIFs and unlocked RPPs. Funds transferred to SPP are subject to all SPP rules including the locking in provision. This means your transferred funds become part of your SPP account and can only be accessed when you choose a retirement option. Since these are direct transfers between plans, there are no tax implications.

Q: How can I convert my SPP savings into retirement income?
A: If having a stable income for the rest of your life is important to you then an annuity from SPP may be an appropriate choice. If maintaining control of investment decisions is important, then a Prescribed Registered Retirement Income Fund (PRRIF) or a Locked-in Retirement Account with another financial institution could be an appropriate alternative for you.

You also have the option to choose a combination of the annuity and PRRIF option.  At retirement time, if you have a pension benefit of $23.29 or less per month, you may choose to take your money out in cash less a 10% withholding tax (sent to Canada Revenue Agency) or transfer your account into an RRSP.

Q: Who will invest my money?
A: SPP has independent, professional money managers. The funds are invested in a diversified portfolio of high quality investments to ensure a competitive rate of return. Your investments are monitored regularly. Leith Wheeler Investment Counsel Inc. and Greystone Managed Investments Inc. are the Plan investment managers.

Further FAQs can be found here.  Additional information is available from the SPP website  or by contacting SPP at in**@sa*********.com, 1-306-463-5410 (call collect) or 1-800-667-7153 (out of province, in Canada).

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Written by Sheryl Smolkin
	Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.

By Sheryl Smolkin

It’s registered retirement savings plan season again and media ads from financial institutions encouraging you to open a plan and invest in their products are running 24/7. But you are really not sure whether you should opt to save your hard-earned money in the Saskatchewan Pension Plan, an RRSP or a tax-free savings plan.

There is not a single answer that will meet the needs of every individual or their family. You may opt to split your savings among the three types of plans in order to meet different savings objectives. But the fact is that SPP is the ONLY one of these three types of registered plans that has a single purpose:

“To help you save money exclusively for retirement.“

You can withdraw money from your RRSP and pay the taxes in your year of withdrawal, but when you do take money out, that contribution room is totally lost to you. You can also take money out of your TFSA and your contribution room is restored the following year. However, every time you withdraw money you interrupt the tax-free growth of your contributions plus investment earnings.

SPP is a locked-in pension plan which means your account must stay with the Plan until you are at least 55 years old. In the event of your death, the money in your account will be paid to your beneficiary. Within six months of joining SPP, you can withdraw your contributions if you decide that you do not wish to participate in the Plan. After six months, the funds are locked in.

SPP follows the same income tax rules as an RRSP except that SPP is locked in. Under tax rules contributions to SPP can be used as repayments to the Home Buyers Plan (HBP) and the Lifelong Learning Plan (LLP). However SPP withdrawals are not permitted for this purpose. A taxpayer can designate all or part of the contribution as a repayment on Schedule 7 and file it with their tax return. SPP does not track repayments to the HBP.

The plan is designed to be very flexible and to accommodate your individual financial circumstances. Even contributing $10 per month will build your SPP account and provide you with additional pension at retirement. The maximum contribution is $2,500 per year subject to available RRSP room and there is no minimum contribution.

Transfers into SPP from RRSPs and unlocked RPPs of up to $10,000 a year are also allowed and spousal contributions are permitted. Contributions you make to a spouse or common-law partner’s account reduce your RRSP deduction limit. The total amount you can deduct for a given tax year cannot be more than your RRSP deduction limit. Contribution and PAC forms have a section to designate contributions for spousal deduction.

Between the ages of 55 and 71 when you opt to retire, one of the options available is to transfer to the amount in your SPP account to either a Prescribed Registered Retirement Income Fund (PRRIF) or a Locked-in Retirement account (LIRA) with another financial institution.

You can also select an annuity option. The amount of your monthly payment will depend on which annuity option you choose, your age at retirement, your account balance, and the interest and annuity rates in effect when you retire. SPP can provide a personal pension estimate for you if you call the toll-free line at 1-800-667-7153.

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It’s been six years since I started working with SPP and wrote my first article about the plan. I joined SPP and have transferred $10,000 in every year since. According to my June 2016 statement I had $80,140.74 in my account. By the time I am 71, I hope to have a total of about $150,000 in the plan. I like the low fees (1% a year or less) and that my money is professionally managed.

In five years I intend to purchase a joint and survivor annuity to provide a guaranteed monthly payment for my husband’s and my lifetime. This stream of income will provide further income security as we age in addition to our other pension income.

We also have other registered and unregistered savings which we can use for a variety of purposes including funding an estate for our children. But I’m pleased that that over a 30 year period the average SPP balanced fund return has been 8.10% and as of the end of November 2016, balanced fund YTD returns were 5.29%.

If you want to fund a pension that will be there when you need it most, check out SPP or top up your SPP savings. Then allocate the balance of your savings for next year to other available accounts.

You will be glad you did. After all, no one wants to put all their eggs in one basket!

By Sheryl Smolkin

Four years ago I wrote an article for the Toronto Star about the Saskatchewan Pension Plan called Is this small pension plan Canada’s best kept secret? Subsequently I was asked to help SPP implement a social media plan and started blogging weekly on savewithspp.com.

I learned that the plan is open to anyone between ages 18 and 71 who has registered retirement savings plan contribution room, regardless of where they live in Canada.

Although I receive a defined benefit pension and save in a personal RRSP, TFSA and unregistered investment account, I decided to open an account with SPP and encouraged my husband and other family members to also join the plan.

Here are five of the reasons why I decided to join SPP and continue to make regular contributions:

1. Contributions: SPP members with employment income can contribute up to $2,500/year. Because I have incorporated and my company pays me dividends and not salary, I do not have RRSP contribution room. However, I can transfer in $10,000/yr. from my personal RRSP. I take full advantage of this feature.
2. Professionally managed money: I read and write about how to invest retirement savings every day. Yet I still don’t always feel confident making major investment decisions. I like that my contributions to SPP are managed by investment professionals. Investments are also reviewed quarterly by five appointed trustees who care about putting returns in my pocket. One-third of SPP trustees are members.
3. Investment fees: Fees can make a huge difference in the amount of money I accumulate in the plan. SPP has NO extra fees. There are no fees to join, change, start, increase or decrease contributions. The only fee charged is a management fee that typically averages 1%. This fee pays all professional and operating expenses of the plan.
4. Investment returns: SPP returns are solid. There will always be fluctuations in market returns from year to year but I’m in it for the long haul. In 2014 the Balanced Fund earned 9.1% and over SPP’s 29 year history average earnings have been a healthy 8.1%.

Fund return history
	Balanced fund %	Short-term fund %
2014	9.10	0.64
5 year	8.21	N/A
10 year	5.63	N/A
29 year**	8.16	N/A
** Return since the inception of SPP.

5.  Annuity purchase: Members can elect to transfer out SPP savings into a locked-in retirement account (LIRA) after age 55 and convert their LIRA into a registered retirement income fund (RRIF) no later than the end of the year they turn 71. They can also transfer the money directly into a prescribed RRIF. But I will probably opt for an annuity purchased from the plan at age 71 that will pay me a monthly income for life with a survivor pension for my husband. I like the idea that this will generate another stream of predictable income to support me when I’m retired.

Also read:
Understanding SPP annuities

Have you started saving with SPP yet? Have you made your 2014 contribution? It’s easy but if you need help you can call 1-800-667-7153 a real person in Kindersley, Saskatchewan will always answer your call.  You can also find out more about the SPP here and here.