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).

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).

Why You Might Want To Withdraw MORE Than The RRIF Minimum

Why You Might Want To Withdraw MORE Than The RRIF Minimum

At some point every retiree with an RRSP is going to need to make a decision about converting their RRSP to a RRIF. The Registered Retirement Income Fund (RRIF) works very similarly to the RRSP with a couple notable exceptions.

One of those exceptions is that there is a minimum RRIF withdrawal. Retirees need to make this minimum withdrawal from their RRIF each year. This minimum withdrawal escalates each year as the retiree gets older. By the time a retiree reaches their mid-90s they are forced to withdrawal 20% of their RRIF each year!

Because the withdrawal is a minimum, and conversion from a RRSP to a RRIF is mandatory, this often leads retirees to believe that keeping money in a RRIF is a good idea. After all, if they’re being forced to take money out, wouldn’t that suggest that keeping money in is a good idea?

For many retirees, taking out only the minimum RRIF withdrawal each year is actually a bad idea. Many retirees would benefit from a different RRIF withdrawal strategy. Many retirees would benefit from taking out more than the minimum each year. They would increase their financial flexibility, they would decrease the tax on their estate, and they could even qualify for certain benefits late in retirement.

RRIF withdrawal strategy is especially important now. The federal government just announced that the minimum RRIF withdrawal for 2020 will be reduced by 25%. This may lead many retirees to “take advantage” of this opportunity when it’s not necessarily in their best interest.

In this post we’ll look at RRIF withdrawal rules, the minimum RRIF withdrawal percentage by age, and we’ll explore two scenarios where we show how a retiree can benefit from RRIF withdrawals that are larger than the minimum.

We’ll also explore how this strategy is even more impactful now, after a large stock market correction.

How Do Tax Brackets Work? What Is Your Tax Bracket?

How Do Tax Brackets Work? What Is Your Tax Bracket?

How do tax tax brackets work? How do you figure out your tax bracket? These are important questions, especially when you’re trying to make the most of your money.

Figuring out your tax bracket can be very helpful when making personal finance decisions. It can help you decide which type of account to use, for example the TFSA or the RRSP. It can also help you understand how much you’ll keep after receiving a raise. It can help you understand how much tax you’ll pay on any extra spending in retirement.

Understanding how tax brackets work, and what tax bracket you’re in, will help you make smarter financial decisions.

But tax brackets can be confusing, they can feel like a real mess of numbers. And even when you understand how tax brackets work there is something called your marginal effective tax rate that can add to the complexity. This is when we look at both income tax rates plus government benefit clawback rates. Looking at both income tax rates and government benefit clawback rates at the same time can expand the number of tax brackets to 10-20+

In this post we’re going to show you how tax brackets work with a few visual examples. We’ll break down a few different income levels into their different tax brackets.

We’ll also talk about tax deductions and tax credits and how they affect (or don’t affect) your tax bracket. Lastly, we’ll touch on marginal effective tax rates.

Do I Have To File Taxes? No, But You Should! Here’s Why…

Do I Have To File Taxes? No, But You Should! Here’s Why…

Do you have to file taxes each year? Technically no, if you meet certain criteria, but you probably should anyway.

Filing taxes doesn’t have to be difficult. There are many great tools and resources that can help make filing taxes easy. But the longer you put it off the more difficult it will become. So even if you don’t need to file it’s a good idea to do it every year.

Technically the government doesn’t force you to file taxes unless you meet certain criteria. If the government owes you money in the form of a tax refund then they’re happy to hold onto that money for you indefinitely. As you’ll see below, there are certain criteria that the government looks at when determining if you need to file a tax return or not.

But even though you may not NEED to file a tax return you probably should. There are many good reasons to file your tax return each year.

Not filing a tax return may mean that you’re leaving money on the table, not just in the form of a tax refund but also the potential government benefits that you may be eligible for.

ELI5: What Is A TFSA? The TFSA Explained To A 5-Year Old

ELI5: What Is A TFSA? The TFSA Explained To A 5-Year Old

The Tax-Free-Savings-Account (TFSA) is a great way to save and invest for the future. In our opinion, it’s the best tax advantaged account in Canada, and probably the first tax advantaged account most people should use (versus an RRSP or RESP). But with all the rules it can be very misunderstood.

To get the most out of your TFSA you have to have a good idea of how it works, what the benefits are, and what the limitations are.

The Canadian government introduced TFSAs in 2009 as an incentive to help any Canadians 18 years or older save more money. Although called a “Tax Free Savings Account”, the TFSA is more than an average savings account.

Even though the TFSA has been around for 10+ years, there is still a lot of confusion about how TFSAs work and what the benefits are.

In this post we’ll do an ELI5 for the TFSA (ELI5 = explain it like i’m 5-years old) and share some of the important considerations when using a TFSA.

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