Gucci

Retirement Funds in Canada

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Gucci

Hi Everyone,

I'm new to the Forum and have a burning question which is a huge concern at this stage.  I hope you guys can shed some light on this.

Firstly, I'm a 40+ individual wanting to move to Canada but fear that I might not be able to afford to retire in Canada at age 65+ since I would have to start all over in Canada and saving up at this age while still settling might be very difficult.

Can anyone give advice on what the best options are when moving to Canada and which types of Funds a person should be looking at?  Any advice on how the Canadian retirement contributions work?

Looking forward to all your advice.

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Ominous_Hashtag

Hi Gucci,

Welcome to the forum.

I haven't made the move yet but I've recently put in some time to research this particular subject and am happy to share what I've learned until the established Canadian Saffers can help out and clarify. I'm not giving you any financial advice, just referring you to the reading materials I've found helpful. I'm sure some good advice will follow from others in due course.

First off, based on some basic research I've done it seems that I would need about C$1m - C$1.2m at retirement to live reasonably comfortably. This is at age 65 (which, for me, is more than 30 years from now). This would obviously be different for you, here are online calculators you can try out just to start getting an idea:

https://www.retirementadvisor.ca/retadv/apps/retirement/retsave_inputs.jsp?toolsSubMenu=preRet

http://www.rbcroyalbank.com/products/rrsp/rsp-matic/index.html

In Canada the following types of retirement savings vehicles are common:

1. Canada Pension Plan (CPP):

The CPP program mandates all employed Canadians who are 18 years of age and over to contribute a prescribed portion of their earnings income to a federally administered pension plan.
When the contributor reaches the normal retirement age of 65, the CPP provides regular pension benefit payments to the contributor. Currently, this is equal to 25% of the earnings on which CPP contributions were made over the entire working life of a contributor from age 18 to 65 in constant dollars.

Monthly benefits are adjusted every year based on the Consumer Price Index. CPP benefit payments are taxable as ordinary income.

https://en.wikipedia.org/wiki/Canada_Pension_Plan

https://www.canada.ca/en/services/benefits/publicpensions/cpp/contributions.html

2. Old Age Security (OAS):

The Old Age Security pension (or OAS or OAS-GIS) is a taxable monthly social security payment available to most Canadians 65 years of age or older with individual income less than $114,815. As of September 2017, the basic amount is $583.74 per month. At tax time, recipients with a 2014 income of over $71,592 must pay back a portion of their Old Age Security at a rate of 15% of net income. This is often referred to as the "OAS clawback". OAS amounts are indexed to the Canadian Consumer Price Index and are adjusted (generally, increased) four times per year.

https://en.wikipedia.org/wiki/Old_Age_Security

 

3. Registered Retirement Savings Plan (RRSP):

An RRSP is a retirement savings plan that you establish, that we register, and to which you or your spouse or common-law partner contribute. Deductible RRSP contributions can be used to reduce your tax.

Any income you earn in the RRSP is usually exempt from tax as long as the funds remain in the plan; you generally have to pay tax when you receive payments from the plan.

https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/registered-retirement-savings-plan-rrsp.html

http://www.cbc.ca/news/business/rrsp/tfsa-rrsp-tax-retirement-savings-1.3371418

4. Tax-Free Savings Account (TFSA):

The Tax-Free Savings Account (TFSA) program began in 2009. It is a way for individuals who are 18 and older and who have a valid social insurance number to set money aside tax-free throughout their lifetime. Contributions to a TFSA are not deductible for income tax purposes. Any amount contributed as well as any income earned in the account (for example, investment income and capital gains) is generally tax-free, even when it is withdrawn.  Administrative or other fees in relation to TFSA and any interest or money borrowed to contribute to a TFSA are not deductible.

https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account.html

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MaryJane

Like Ominous, I will impart what I know. Here's the breakdown in bite-size form:

1. CPP - government-run pension plan. A % is deducted from your salary. Employer matches your deduction. This deduction + matching continues until you reach the CPP limit for the year. What you accumulate highly depends on how many years you have been working in Canada and/or contributing to it.

2. OAS - government-run. You cannot contribute into this. To get this benefit at retirement age, you have to be eligible. You do not need to be "retired" or have stopped working at that point in time, just that you've reached a certain age. You can defer receiving this benefit.

3. RRSP - managed by contributor (or the bank or the fund manager). You set this up. Contributions are limited up to 18% of your annual salary (referred to as contribution room) or the RRSP annual limit for the year. Unused contributions accumulate each year. Contributions are tax-deductible. Note: on your first year in Canada as a newcomer, you may not be able to contribute to this until you've submitted your first tax return and CRA has determined your contribution room.

4. TFSA - managed by contributor (or the bank normally). You set this up. This is more of an investment vehicle than a retirement one. Contributions are limited to the TFSA limit each year (currently at $5,500 annual). Unused contributions accumulate each year. Contributions are not tax-deductible. Ensure your contributions are within this limit. The fines on over contribution are stiff. You can contribute almost immediately as soon as you get to Canada.

5.RPP (registered pension plan) - employer-sponsored. Not all employers offer this. You contribute into it. It is not mandatory. Matching % and/or employer contribution depends highly on employer and policy. Subject to annual limits, if the plan is not a defined benefit plan. https://www.canada.ca/en/revenue-agency/services/tax/registered-plans-administrators/about-registered-pension-plans-rpps/about-registered-pension-plans-rpps.html

6. DPSP (deferred profit-sharing plan) - employer-sponsored. Not all employers offer this. You do not contribute into this. Contributions are based on company's earnings. Subject to annual limits. https://www.canada.ca/en/revenue-agency/services/tax/registered-plans-administrators/deferred-profit-sharing-plans-supplementary-unemployment-benefit-plans-dpsps-subps.html

The above are the general ones but there are others somewhat specific or intricate like RRIF (https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4040-rrsps-other-registered-plans-retirement-2016/rrsps-other-registered-plans-retirement.html#P2188_56980).

Hope this helps.

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Gucci

Thank you so much for the links and information.  It really helps to have some point to start with.  I was looking at some figures and since not all employers pay towards a pension fund, it seems like the individual really need to invest smartly in order to have something at all to retire with.  Perhaps property is the best way to invest then?

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Gary van der Westhuizen

@Ominous_Hashtag very informative! Thank you! This might be a bit technical, but how did you get to the $1mil? For how many people is that? What inflation and growth rates did you assume? I get to a similar value, assuming a net return of 4% for 30 odd years. If you add that to your CPP I guess you should be ok.

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MaryJane
17 hours ago, Gucci said:

Thank you so much for the links and information.  It really helps to have some point to start with.  I was looking at some figures and since not all employers pay towards a pension fund, it seems like the individual really need to invest smartly in order to have something at all to retire with.  Perhaps property is the best way to invest then?

Property prices in the GTA have been crazy for a few years. But if you can afford the prices, why not? ;)

How about stock trading, etc? Within TFSAs and RRSPs, you could have the choice to self direct the fund. Something like this - https://www.rbcdirectinvesting.com/investing-for-retirement.html

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Ominous_Hashtag
15 hours ago, Gary van der Westhuizen said:

@Ominous_Hashtag very informative! Thank you! This might be a bit technical, but how did you get to the $1mil? For how many people is that? What inflation and growth rates did you assume? I get to a similar value, assuming a net return of 4% for 30 odd years. If you add that to your CPP I guess you should be ok.

Hi @Gary van der Westhuizen, I didn't feel comfortable performing my own manual calculations just yet, think I need to understand the various "local" factors/rates at play a bit better first.

The $1m - $1.2m is for one person (but to be honest I initially worked on two persons and just divided - which is probably a gross oversimplification considering you'll be cohabiting etc) and it was simply based on a combination of the answers I got back from various Canadian online retirement calculators. I'm just using that as a starting point. It's a good sign if you got a similar answer! :)

Edited by Ominous_Hashtag
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Tracey22

in terms of CPP - you have to be working for 40 years to get the full CPP benefit.  very few people get the full CPP benefit.

Also, if your retirement income exceeds a certain value, the CRA will clawback OAS

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Gucci

Thank you to everyone who contributed to this post and for shedding light on things like CPP.  It is clearly best if you make your move over at an early age!

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Tracey22
On 1/7/2018 at 9:17 AM, Ominous_Hashtag said:

 

First off, based on some basic research I've done it seems that I would need about C$1m - C$1.2m at retirement to live reasonably comfortably. This is at age 65 (which, for me, is more than 30 years from now). This would obviously be different for you, here are online calculators you can try out just to start getting an idea: contributions can be used to reduce your tax.

Wow, I honestly know very few people who have $1 million at retirement!!!

The average household income in the GTA is about $75,000.  To save a million dollars per person after working 30 or 40 years that is a huge feat.

 

So my sisters mother-in law gets OAS and a small pension from South Africa.  She lives in Ottawa and rents a 2 bedroom apartment.  She is able to live on about $3,000 per month.  She is by no means extravagant, but neither is she so short of money that she cannot afford anything.

 

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Gary van der Westhuizen

@Tracey22 the plan is not to save $1mil, but to save some and make the wonders of compound interest work for us. :-) At least that is what I did in my very rudimental calc.

I have also given the housing thing some thought. Technically if you own a bigger house, and sell it, and buy a smaller retirement place, this could make up some of your $1mil. Theoretically... I haven't actually done any math on that.

I have also been thinking about moving retirement funds from SA as a deposit for a house here,  the capital appreciation could give you the same growth as an RRSP, I am just not convinced on the compounding part, as I think your RRSP will give you better growth when combining it with current contributions... Once again, I am yet to do this calculation.

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Gary van der Westhuizen

I forgot to mention the tax... With RRSP you get up to 18% tax free a year, with a carry over. If you have a house as a primary residence, there is CGT exemptions. So many moving parts!

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SunshineGirl

@Gary van der Westhuizen, I 'd be very interested to learn from what you find out in the coming months, etc.  Hubby's & my personal approach is more the brick & mortar retirement plan, where we have our hands on our own money & manage our own investment property & tenant.  We're from the school of thought that no-one is going to care about our retirement savings like we are as we stand the most to gain / loose from it.  In theory rentals keep up with inflation, so a rental income or two or more, should do the trick, however, CA tax rates, laws, etc could change our scenario.  So very interested in this topic..

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Gary van der Westhuizen

@sunshine I will keep everyone posted. I agree, investment properties are good, but unfortunately not within everyone's reach. RRSP's make it a bit more manageable.

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Ominous_Hashtag
16 hours ago, Tracey22 said:

Wow, I honestly know very few people who have $1 million at retirement!!!

The average household income in the GTA is about $75,000.  To save a million dollars per person after working 30 or 40 years that is a huge feat.

 

So my sisters mother-in law gets OAS and a small pension from South Africa.  She lives in Ottawa and rents a 2 bedroom apartment.  She is able to live on about $3,000 per month.  She is by no means extravagant, but neither is she so short of money that she cannot afford anything.

 

Like @Gary van der Westhuizen said, you're not expected to put away $1m, you just need to put away enough money at the right intervals in order for it to grow to $1m. Also remember that in the case I was describing this is more than 30 years away, decades of inflationary effects have been taken into account to get to the $1m requirement. People retiring now would need significantly less than people retiring 30-35 years from now and can't really be compared.

On a separate note, one intriguing feature of the RRSP is the Home Buyers’ Plan (HBP). It allows you to borrow from your retirement savings (up to $25,000 per person) in order to fund a down-payment on a first home. How wise this actually is, I'm unsure, but it could put a home within reach for young first-time buyers whilst still allowing for the tax benefits of an RRSP.

https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/what-home-buyers-plan.html

https://globalnews.ca/news/3265272/rrsp-home-buyers-plan-vs-tfsa/

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Gary van der Westhuizen

Hi All 

So we are in the process of getting our RA's paid out of SA and moving them over. My knee jerk reaction is to reinvest it here in an RRSP, but recently  I have learnt that you are penalized if you go over the 18% yearly contribution? I know you can technically invest all of it and only declare some of it for a number of years, but it doesn't seem logical to me ( and seems like too much admin). Has anyone else done something similar? Encountered the same dilemma? Am I missing something obvious? 

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Gary van der Westhuizen

Hi All 

We came over in Oct 2017, got jobs in November 2017 (thankfully), which meant we didn't have much room for RRSP contributions in 2018 (only realising that now) I was wondering if anyone else ever ran into this? 

We contributed throughout 2018, with the thought that your 2018 income would count towards your limit. It seems that it doesn't, and you are only allowed to contribute $2000 for that first period, and if you go over, you get penalised @ 1% per month for the period you are over. 

Anyone run into this? Any advise? Can you roll it forward? 

Thanks in advance! 

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MaryJane

Hi @Gary van der Westhuizen, if I'm understanding correctly, you over-contributed than what is allowed by your contribution room for 2018, right?

I can confirm about the penalty of 1% per month for every month that the over-contributed amount is in the RRSP account. That is in effect.

Your contribution room should be noted on your Notice of Assessment for 2017. The extra $2,000 is if you unintentionally over-contributed and realised too late that the amount is already in the account. You cannot use this $2,000 as a tax deduction though.

(For example, your contribution room was $5,000, then you could contribute to a max of $7,000 without getting penalised).

You could do 2 things:

1. Work out the over-contribution now and settle the penalty. You have to submit a T1-OVP form within 90 days of the year ending, so that would be end of March? File early, don't make it late because then, interest will start piling up on the penalty.

2. Withdraw the over-contribution and request CRA to waive the penalty. You need to write a letter to explain the reason for over-contribution and steps you have taken to rectify the situation. To request waiving the penalties, you also need to submit RC4288 form (Request for Taxpayer Relief) and lots of proof. I believe there is also withholding taxes to think about here as it does trigger a withholding tax situation when you withdraw the RRSP monies.

No guarantee that the CRA will waive the penalty but it might be worth a try to get it waived especially if the penalty is substantial.

Hope this helps.

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Gary van der Westhuizen

Thank you @MaryJane! I got some advice from a tax practitioner who is helping me with it. 

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