“Welcome to the PlanEasy blog! We make personal finance easy.

Thanks for visiting.”

– Owen

What Is A Pension Adjustment? What Is A Pension Adjustment Reversal?

What Is A Pension Adjustment? What Is A Pension Adjustment Reversal?

What is a pension adjustment? What is a pension adjusted reversal? If you’ve recently done your taxes or received your notice of assessment you may be wondering what these terms mean. You may have noticed large amounts of money being attributed to these items. You also may have noticed that they affect your available RRSP contribution room.

Anyone with a registered pension plan (RPP) or deferred profit sharing plan (DPSP) will notice that they’re receiving a pension adjustment.

The purpose of the pension adjustment is simple, it’s meant to equalize registered assets between those with employer sponsored pensions and those without. It reduces RRSP contribution room for those who receive (or will receive) benefits from a pension plan or deferred profit sharing plan.

The maximum anyone can put into their RRSP is 18% of previous years earned income up to the annual max. The pension adjustment reduces this new RRSP contribution room, sometimes to nearly nothing, in an attempt to make things more fair. The idea is that the maximum that can be put into registered savings (either pension, DPSP or RRSP) should be fair for everyone.

To do this effectively we need the pension adjustment (PA) and when people leave a pension or deferred profit sharing plan we need a pension adjustment reversal (PAR) (more on that later).

read more
How Are Dividends Taxed? How Can They Lower Taxes In Retirement?

How Are Dividends Taxed? How Can They Lower Taxes In Retirement?

Dividends from Canadian corporations receive some special tax treatment that can make them an attractive investment in non-registered accounts. This special treatment means that they can help lower your average tax rate, especially in retirement.

But this special tax treatment makes it a bit confusing to understand how dividends are taxed. To calculate tax on Canadian dividends there are things like “gross ups” and dividend tax credits to consider.

Despite the extra confusion caused by this special tax treatment it can be very attractive to invest in Canadian companies. For most people there is a significant tax advantage when receiving Canadian dividends. For example, in Ontario, a retiree in the lowest tax bracket will experience a negative tax rate on eligible dividends!

The way these eligible dividends are taxed can help offset other income from CPP, OAS, pensions and RRSP withdrawals. With a bit of tax planning this advantage could add thousands in after-tax income for a retiree.

In this post we’ll look at how dividends are taxed, the difference between eligible and non-eligible dividends, and we’ll look at an example of how eligible dividends can help lower taxes in retirement (all the way to zero!).

Lastly, we’ll also look at how the dividend gross up can also trigger OAS clawbacks for high income retirees. A surprising negative of the way dividends are taxed (although it’s still an attractive form of income).

read more
The Impact Of Saving vs Spending Over A Lifetime: A Case Study

The Impact Of Saving vs Spending Over A Lifetime: A Case Study

Spending is one of the most important factors in someone’s personal finances. Even a small amount of extra spending, over a long period of time, can have a very large impact on someone’s financial situation.

In this post we’re going to explore how large this impact can be. To do that we’re going to follow two people through their financial lives, from starting university all the way through to late retirement. Year-by-year we’re going to see how spending impacts their finances.

Spending is an interesting topic. It’s such an important factor in everyone’s finances and yet everyone spends money differently. We all value things differently, which means we choose to spend extra money on different things. This makes it very hard to figure out what “the right amount of spending” actually is. Spending is very subjective.

What makes it even more complicated is that we all have learned habits and behaviors that impact our spending. These habits are learned over time and can be very difficult to break.

Plus, we’re all impacted by our past spending decisions (ie locking into an expensive car lease, buying ‘too much’ house, putting a vacation on credit). Even if we have the best intentions going forward, these past spending decisions can be an anchor.

Spending also has a large impact. A small amount of extra spending can have a large impact over time. Compounding means that just a little bit of extra spending, over a long period of time, has an enormous impact on our financial lives.

As an example, spending an extra $10 per day seems small. It’s pretty easy to spend $10 per day. This is a coffee every day plus a purchased lunch every other day. This is a nice meal at a restaurant once per week. It’s an extra piece of clothing every week or two. Or it could be a slightly larger home costing an extra $100,000, which comes with extra interest expenses, extra property tax, and extra heating and maintenance costs. It could be driving to work instead of walking, biking or using public transit. Or it could be a combination of these things.

Even though an extra $10/day in spending seems small and is easy to do if you’re not paying attention, over time it has a huge impact on a person’s financial life.

This post will follow two people through their financial lives, with one person spending $10/day more than the other. It may seem small, after all it’s only $10, but that adds up $3,650 per year, or $36,500 every 10-years, and that doesn’t even account for compounding.

By following two people through their financial lives we’ll see how spending an extra $10/day causes their financial lives to diverge dramatically.

For our example we’ll use two friends from high school, Katie and Kyle, they’re both 18 years old and about to enter university. They’re both entering an engineering program and have very little saved for university. They’ll use student loans plus summer jobs earning $12,000 per summer to help pay for their education.

Most important however is that Kyle is the more spendthrift friend out of the two, spending an extra $10/day than Katie. This habit of spending vs saving will continue throughout their lives with Kyle always spending $10 more per day and Katie saving that $10.

Let’s follow Kyle and Katie through a few periods of their life. We’ll see how a seemingly insignificant $10/day can cause their financial lives to diverge dramatically over time.

read more

Owen Winkelmolen

Fee-for-service financial planner and founder of PlanEasy.ca

“Welcome to the PlanEasy blog! We make personal finance easy.

Thanks for visiting.”

– Owen

New blog posts weekly!

Tax planning, benefit optimization, budgeting, family planning, retirement planning and more...

What Is A Pension Adjustment? What Is A Pension Adjustment Reversal?

What Is A Pension Adjustment? What Is A Pension Adjustment Reversal?

What is a pension adjustment? What is a pension adjusted reversal? If you’ve recently done your taxes or received your notice of assessment you may be wondering what these terms mean. You may have noticed large amounts of money being attributed to these items. You also may have noticed that they affect your available RRSP contribution room.

Anyone with a registered pension plan (RPP) or deferred profit sharing plan (DPSP) will notice that they’re receiving a pension adjustment.

The purpose of the pension adjustment is simple, it’s meant to equalize registered assets between those with employer sponsored pensions and those without. It reduces RRSP contribution room for those who receive (or will receive) benefits from a pension plan or deferred profit sharing plan.

The maximum anyone can put into their RRSP is 18% of previous years earned income up to the annual max. The pension adjustment reduces this new RRSP contribution room, sometimes to nearly nothing, in an attempt to make things more fair. The idea is that the maximum that can be put into registered savings (either pension, DPSP or RRSP) should be fair for everyone.

To do this effectively we need the pension adjustment (PA) and when people leave a pension or deferred profit sharing plan we need a pension adjustment reversal (PAR) (more on that later).

read more
How Are Dividends Taxed? How Can They Lower Taxes In Retirement?

How Are Dividends Taxed? How Can They Lower Taxes In Retirement?

Dividends from Canadian corporations receive some special tax treatment that can make them an attractive investment in non-registered accounts. This special treatment means that they can help lower your average tax rate, especially in retirement.

But this special tax treatment makes it a bit confusing to understand how dividends are taxed. To calculate tax on Canadian dividends there are things like “gross ups” and dividend tax credits to consider.

Despite the extra confusion caused by this special tax treatment it can be very attractive to invest in Canadian companies. For most people there is a significant tax advantage when receiving Canadian dividends. For example, in Ontario, a retiree in the lowest tax bracket will experience a negative tax rate on eligible dividends!

The way these eligible dividends are taxed can help offset other income from CPP, OAS, pensions and RRSP withdrawals. With a bit of tax planning this advantage could add thousands in after-tax income for a retiree.

In this post we’ll look at how dividends are taxed, the difference between eligible and non-eligible dividends, and we’ll look at an example of how eligible dividends can help lower taxes in retirement (all the way to zero!).

Lastly, we’ll also look at how the dividend gross up can also trigger OAS clawbacks for high income retirees. A surprising negative of the way dividends are taxed (although it’s still an attractive form of income).

read more
The Impact Of Saving vs Spending Over A Lifetime: A Case Study

The Impact Of Saving vs Spending Over A Lifetime: A Case Study

Spending is one of the most important factors in someone’s personal finances. Even a small amount of extra spending, over a long period of time, can have a very large impact on someone’s financial situation.

In this post we’re going to explore how large this impact can be. To do that we’re going to follow two people through their financial lives, from starting university all the way through to late retirement. Year-by-year we’re going to see how spending impacts their finances.

Spending is an interesting topic. It’s such an important factor in everyone’s finances and yet everyone spends money differently. We all value things differently, which means we choose to spend extra money on different things. This makes it very hard to figure out what “the right amount of spending” actually is. Spending is very subjective.

What makes it even more complicated is that we all have learned habits and behaviors that impact our spending. These habits are learned over time and can be very difficult to break.

Plus, we’re all impacted by our past spending decisions (ie locking into an expensive car lease, buying ‘too much’ house, putting a vacation on credit). Even if we have the best intentions going forward, these past spending decisions can be an anchor.

Spending also has a large impact. A small amount of extra spending can have a large impact over time. Compounding means that just a little bit of extra spending, over a long period of time, has an enormous impact on our financial lives.

As an example, spending an extra $10 per day seems small. It’s pretty easy to spend $10 per day. This is a coffee every day plus a purchased lunch every other day. This is a nice meal at a restaurant once per week. It’s an extra piece of clothing every week or two. Or it could be a slightly larger home costing an extra $100,000, which comes with extra interest expenses, extra property tax, and extra heating and maintenance costs. It could be driving to work instead of walking, biking or using public transit. Or it could be a combination of these things.

Even though an extra $10/day in spending seems small and is easy to do if you’re not paying attention, over time it has a huge impact on a person’s financial life.

This post will follow two people through their financial lives, with one person spending $10/day more than the other. It may seem small, after all it’s only $10, but that adds up $3,650 per year, or $36,500 every 10-years, and that doesn’t even account for compounding.

By following two people through their financial lives we’ll see how spending an extra $10/day causes their financial lives to diverge dramatically.

For our example we’ll use two friends from high school, Katie and Kyle, they’re both 18 years old and about to enter university. They’re both entering an engineering program and have very little saved for university. They’ll use student loans plus summer jobs earning $12,000 per summer to help pay for their education.

Most important however is that Kyle is the more spendthrift friend out of the two, spending an extra $10/day than Katie. This habit of spending vs saving will continue throughout their lives with Kyle always spending $10 more per day and Katie saving that $10.

Let’s follow Kyle and Katie through a few periods of their life. We’ll see how a seemingly insignificant $10/day can cause their financial lives to diverge dramatically over time.

read more

New blog posts weekly!

Tax planning, benefit optimization, budgeting, family planning, retirement planning and more...

New blog posts weekly!

Tax planning, benefit optimization, budgeting, family planning, retirement planning and more...

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