How Do Employee Pension Plans Work?

How Do Employee Pension Plans Work?

Employer-sponsored plans are complicated. But with a few basic facts, you can make better decisions for you and your family.

1. What kinds of employee pension plans are there? 

There are two basic kinds of plans: defined benefit plans and defined contribution plans.

  • Defined benefit plans provided members with a retirement income based on a calculation that typically factors in years of service with the employer and salary earned. The member may contribute to the plan during his or her time as an employee with the organization. Employer and member contributions are pooled in a pension fund and invested. The pension plan sponsor (the employer) is responsible for ensuring that the plan can pay members the required retirement income.
  • Defined contribution plans allow organizations to sponsor plans without bearing the investments risk that comes with a defined benefit plan. Each member has his or her own account. Employer and member contributions are invested, usually based on investment options selected by the member. Your retirement income is determined by how your investments perform. Defined contribution pension plans, group registered retirement savings plan, employee share purchase plans, deferred profit-sharing plans and group tax free savings account plans are all examples of defined contribution schemes.

2. What role does my employer play in the plan’s management, and who else is involved?

Typically, pension plan sponsors rely on a rage of service provied, including plan administration services providers, investment fund managers, life insurance companies, trust companies, and consultants.

Insurance companies can provide third-party administration services and investment management. Trust companies provide custodial services. Consultants support plan sponsors and pension funds with services such as plan valutation, pension design consulting, member communications consulting and fund manager search services.

3. What happens if I leave my employer?

If you’re leaving a plan for any reasons, t can be useful to talk to a financial advisor. You’ll have several options many of which are complex.

Under pension legislation in most Canadian jurisdictions, defined benefit and defined contribution pension plan members may be automatically “vested.” This means you are entitled to recieve the benefits of your own contributions and those of your employer under the plan, without losing your employer’s contributions. In some provinces, you may need to work for your employer or be a member of the pension plan for a specified period before you become vested; if you leave before the benefits vest, you will receive only the value of your own contributions and earning. If your benefits are vested when you leave, you have several options, depending on the applicable legislation and the plan. You may be able to:

  • Leave your assets in the plan you’re exiting.
  • Transfer the value (“commuted value’) of your pension to another pension plan, if you’re joining another one that allows such a transfer.
  • Transfer your commmuted value to a RRSP or other plan, which may be locked in (meaning you can’t withdraw the money until retirement).
  • Take the cash value (if it’s not locked up).

4. Do I pay a fee to participate in a plan?

Defined benefit plan members do not pay fees directly, although the pension plan may pay fees for such things as investment management, actuarial services, etc., out of the pension funds.

Defined contribution plan members may pay fee for investment management, plan administration and other services. Often these fees are built into the management expense charges of the plan. These fees are typically low compared to those charged to retail account holders outside an employer-sponsored plan.

What are the advantages of being a member of an employer-sponsored plan?

There are 3 important advantages of workplace pensions:

  • Pension plans have lower fees than most people can obtain for their own individual investments. For example, defined contribution plan funds typically charge relatively lower investment management fees than would be available to an individual – often less than 1%.
  • Employers typicall also contribute to their employee pension plans. If you have an option to participate or to contribute, choosing not to join a plan or contribute can be like saying no to free money.
  • Plans require you to save, thus taking away guesswork and many of the risks of trying to “time the market” (predict market up-and downturns). It can be difficult to take the time each month to set aside money for retirement savings, but pension plans provide valuable discipline. For example, defined contribution plan members can benefit from dollar-cost averaging when markets are down. By automatically investing a set amount regularly, you’re often able to buy more when prices are lower, instead of being tempted to pull of out the marketing. A pension plan can remove emotion from your investment decisions and help you stay invested for the long term, so you can make the most of your investments.

Should You Contribute to Your TFSA or RRSP?

For many years, Canadians have been taking advantage of tax-deferred investment growth in their RRSPs. However, TFSA provides Canadians with a valuable new opportunity to enjoy tax-free growth.

Should you contribute to your TFSA or RRSP? There is no right or wrong answer because both TFSA and RRSPs are valuable and beneficial. However, in certain circumstances, one may be better than the other. Choosing where to contribute your money to will depend on a number of different factors.

Factors your should consider:

1. Are you saving for a long-term or short-term goal?

RRSPs were designed to provide for a long-term goal retirement. When you contribute to your RRSP, you get a tax deducation which means withdrawals are taxable, unless they’re made under the Home Buyer’s Plan or Lifelong Learning Plan. 

TFSA has the flexibility to accomodate short-term goals. When you contribute to your TFSA, there is no deduction permitted for the contribution which means any amount can be withdrawn, tax-free, at any time for any reason.

2. Are you looking for an effective way to split income with your spouse who is taxed at a lower rate than you?

When you contribute to your spousal RRSP, this will reduce the amount you can contribute to your own RRSP. If you make any withdrawals from your spousal RRSP, it will be taxed if they are made in the same calendar year as a spousal contribution or either of the two subsequent calendar years. After that point, both the income earned on the first contribution and any withdrawals made by your spouse will be taxable.

TFSA is ideal when you want to split income with your spouse. You can give your spouse money contribute to their TFSA and any income earned is not attributed back to you. Any withdrawals by your spouse is tax-free and can be done at any time.

3. Do you want to maintain your eligibility for income-test federal government benefits? 

TFSA withdrawals do not count as income, so they don’t affect eligibility for income-teested federal government benefits such as the Canada Child Tax Benefit, Working Income Tax Benefit, or Employment Insurance benefits.

So should you contribute to your TFSA or RRSP? Your ideal strategy will be to contribute the maximum to your TFSA and RRSP. By contributing to both, you will maximum your tax savings. You can always contact a financial advisor for wealth management services like AWealth to help you decide on how you can allocate your contributions.

Millennials Planning for Retirement

Millennials Planning for Retirement

Are you a Millennial? Well, I have some good news for you! You’re at the perfect age to take a few simple steps that will eventually give you financial freedom in your retirement years. Even though that might seem far a way, it’s simply good financial smarts to set aside money today for financial security in the future.

In 2016, Transamerica conducted a 25-minute online survey of 4,161 full-time or part-time workers who are employed by for-profit companies with at least 10 workers.

What’s working for Millennials?

Approximately 72% of millennial survey respondents said they’re saving for retirement in an employer-sponsored retirement plan or outside of work. The median about these millennials are saving is about 7% of their annual salaries. When it comes to saving for retirement, Millennials are in the middle of the pack, with about 58% actively saving for their golden years compared to 55% of Baby Boomers and 65% of Gen Xers.

Millennials planning for retirement:

 Millennials Starting to Save at Age 25: 

  • To retire at age 62: Save 15 percent of pay
  • To retire at age 65: Save 10 percent of pay
  • To retire at age 67: Save 7 percent of pay
  • To retire at age 70: Save 4 percent of pay

Millennials Starting to Save at Age 35: 

  • To retire at age 62: Save 24 percent of pay
  • To retire at age 65: Save 15 percent of pay
  • To retire at age 67: Save 12 percent of pay
  • To retire at age 70: Save 6 percent of pay

When you use the money you have (your principal) to purchase assets that have the ability to increase in value you are investing. Over time you will accumulate these assets such as mutual funds, bonds, or stocks and you will see that your financial security and net worth will have grown during this period. There are several different investment options to choose from such as RRSP and TFSA.

Save and invest your money to give you financial freedom in your retirement years!

Are RRSPs Right For Me?

Are RRSPs Right For Me?

A Registered Retirement Savings Plan (RRSP) can help you invest your retirement savings. A RRSP is an account that is used for investment assets and holding savings RRSP’s have many kinds of advantages when it comes to taxes.

Benefits of RRSPs 

  1. Tax deferred investments as long as they remain within the plan
  2. Only your registered plan you may hold cash, bonds, mutual funds, and other types of investments
  3. Tax deductible contributions

Making RRSP Contributions 

Your RRSP contributions are tax deducitbile which means you can claim them as a tax deduction when you file your income tax return and lower the tax you pay. There are limits on how much you can contribute to your own RRSPs and your spouse’s RRPs. Each year your total contribution is the lower of 18% of your earned income for the previous year or the maximum contribution amount for the current year which is $26, 010 for 2017. Keep in mind that if you are a member of a pension plan, your pension adjustment will reduce the amount you can contribute to your RRSP.

Let’s say you don’t have the money to contribute to your RRSP this year, you’re able to carry forward your contribution room indefinetely to future years. The unused contribution room will be taken into account on your RRSP Deduction Limit Statement. (You can find your RRSP Deduction Limit Statement on your most recent Notice of Assessment or on CRA’s My Account).

Contributing to your RRSPs make sense in a number of different scenarios:

1. Saving for your retirement 

One example of a scenario is, contributing to an RRSP is a structured way to actively save for your retirement. Since early withdrawal penalties are so stiff, you will be less tempted to borrow from your RRSP for purchases other than retirement like buying a home and paying for education.

2. RRSPs are tax deferred 

Another example of a scenario is, because RRSPs are tax-deffered, it makes sense to contribute to one during your peak earning years when you’re in a higher tax bracket, especially if you expect to be in a lower tax bracket come retirement.

3. Young people beginning their careers 

Another example of a scenario is, young people who are beginning their careers are likely in a lower tax bracket, so it’s a good time to open an RRSP as soon as possible because starting out early means you can take advantage of your investments compounding over time.

So are RRSPs right for me? 

One of the biggest reasons for opening an RRSP  is to take advantage of the tax benefits it provides. The funds you contribute to your RRSP will not be taxed as income until they are withdrawn. This is ideal when you retire and you’re in a lower tax bracket. Income that is earned within the RRSP accumulates tax-free. One of the other major benefit of RRSPs is that you receive tax credits for the amount you contribute up to a limit.

Should You Set Up a Spousal RRSP?

Should You Set Up a Spousal RRSP?

Thinking on setting up a spousal RRSP? Should you set up a spousal RRSP?

A spousal RRSP are one of the ways that couples can split income in retirement. It is for the benefit of one spouse, but contributions are made, and deducted, by the other spouse. Think of spousal RRSPs as investment accounts for your spouse’s retirement which allows you to contribute money tax-free each year. Is there a big income disparity? Are you looking to lighten your tax load? A spousal RRSP will ligthen the tax load as it avoids a higher-income earner from having a large pile of retirement savings in their RRSP while the lower-income earner has a small pile. Setting up a spousal RRSP is a good strategy if you expect one spouse to be in a lower taax bracket in retirement because they provide the benefit of balancing retirement income.

What are the advantage?

 1. Big income disparity

Say you’re a big earner. You make $120,000 a year and your spouse makes $60,000. If you and your spouse had RRSPs and only the owner could contribute, you could put $18,000 (maximum allowed each year) into your RRSP while your husband/wife could contribute $9,000 (both amounts represent the maximum). However, with a spousal RRSP, you can even things out. You can contribute $12,000 into yours and $6,000 into your husband/wife. Therefore, you can still take the total $18,0000 deduction on your income tax and your husband/wife can still contribute $9,000 and take that deduction too.

2. A spousal RRSP aren’t just for retirement

A spousal RRSP aren’t just for retirement. Let’s say one parent decides to leave work or to go back to school. When you contribute to a spousal RRSP in advance, this will allow your husband/wife to withdraw money will unemployed and pay only a little bit of tax and save the contributing husband/wife some tax money now.

3. If one spouse is older than the other

It’s also beneficial if one spouse is older than the other. The older spouse can continue to make RRSP contributions to the spousal plan until the end of the year the younger spouse turns age 71 (provided the contributing spouse has qualifying earned income and available contribution room). There are attribution rules associated with early withdrawals from a spousal RRSP.

5C’s for Clients to Consider Before Assuming an RRSP Loan

5C’s for Clients to Consider Before Assuming an RRSP Loan

When clients are considering an RRSP loan, they can use these 5C’s or five measures to help them gage whether or not this strategy would be viable for their retirement savings.

Here are the 5C’s to consider before assuming an RRSP loan:

1. Capacity

This is the estimated amount of debt a borrower cab carry, and is determined by a mathematical calculation known as their Total Debt Service Ratio (TDSR).

2. Capital 

This is the measure of a borrower’s net worth and demonstrates the ability to manage one’s finances and accumulate assets while repaying debt obligations. Do I have sufficient financial resources?

3. Collateral  

Can my assets back up my debt?

4. Credit History 

What is my current debt and how have I managed my debt in the past?

5. Character

What is my repayment history and am I responsibile enough to stick to a repayment schedule?

Guarantees & Growth for Your Investments

Guarantees & Growth for Your Investments

Segregated funds are an investment solution only available through insurance companies. They help to grow and protect your hard earned money with the added security of principal guarantees. You can think of it as a combination of a mutual fund with an insurance policy. Money is invested in professionally managed and diversified funds with the growth potential similar to mutual funds. But segregated funds have additional insurance components that protect the original amount invested.

Segregated funds offer unique benefits that mutual funds do not, such as:

1. Maturity guarantee vs. death benefit guarantee

A maturity guarantee helps to protect your initial investment (at contract maturity), while a death benefit guarantee ensures that your named beneficiaries will recieve 75% or 100% of the amount that was invested (depending on the guarantee option chosen by you) in 15 years from your initial investment or at time of your death.

2. Potential protection from creditors 

Reduce estate-planning costs. After a person dies, there is a legal approval process required to validate a person’s will.This process is called probate, and can be a lengthy administrative hassle that incurs fees. Segregated funds are not subject to the probate process, meaning that funds go directly to the beneficiary, without any estate or probate fees.

3. Potential protection from creditors 

Potential protection from creditors. Segregated funds are considered an insurance contract so they may be protected under provincial law from seizure by creditors in the event you declare bankruptcy. This may be an important benefit for professionals, entrepreneurs and business owners who might be involved in an unexpected lawsuit or bankruptcy.

4. Reset the guaranteeed value of your investment 

If your investment has increased in value, you may have the option to reset the guaranteed value of your investment, which now protects the new “increased” amount. These guarantees and benefits, combined with the growth potential, what make Segregated funds better for some investors than Mutual Funds.