All posts by Jonathan Chevreau

Why “Topping up to bracket” makes sense if you’re temporarily in a low tax bracket

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My latest column in Wednesday’s Globe & Mail looks at a strategy called “Topping up to Bracket,” which can be useful to anyone who is temporarily in a lower tax bracket.

Click on the highlighted headline to access the online version, assuming you have Globe subscriber privileges or haven’t exceeded the monthly free click quota: A strong tax case for early RRSP withdrawals.

When might you be “temporarily” in a lower tax bracket than usual? This can of course happen when you lose a job or if you’re in your Sixties and transitioning between full employment (typically earning in higher tax brackets) and Semi-Retirement, when it’s tempting to “bask” in lower tax brackets.

Temporary because as Semi-Retirement progresses, you can end up moving back into higher tax brackets: for example, if you start to receive Old Age Security (OAS) at 65, then take Canada Pension Plan (CPP) a few years later, these are both taxable sources of income.

And the big hit can come at the end of the year you turn 71, when RRSPs must be converted to Registered Retirement Income Funds (RRIFs) or else annualized or cashed out. RRIFs entail forced annual withdrawal rates that keep rising between your 70s and your mid 90s.

So that makes “Topping up to Bracket” (a term used in a BMO Wealth Institute paper on the topic, published around 2013) a strategy not to be ignored. In practice it means making sure that in those low-earning years you at least bring into your hands each and every year the roughly $12,000 of untaxed earnings that’s called the Basic Personal Amount (BPA). And as the G&M column explains, it’s also a good idea to at least bring in the dollars that are in the lowest tax bracket (15% federally, 5% in Ontario), or roughly $42,000. There are of course higher tax brackets above that but the law of diminishing returns starts to kick in beyond the $42,000.

Note too that this is a “use it or lose it” proposition. If for example a year went by that you failed even to bring in even that $12,000 income that would not have been taxed, you can’t carry forward the opportunity to benefit from it the following year. You will of course have another opportunity for the BPA that year but it won’t double up because you neglected to earn low- or non-taxed income the previous year. Continue Reading…

Retired Money: Early or Delayed CPP? Age 65 may be best compromise

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My latest MoneySense Retired Money column has just been published, which tackles that perennial personal finance chestnut of whether to take early or delayed CPP benefits. You can find it by clicking on the highlighted headline here: The Best Time to Take CPP: if you don’t know when you’ll die.

That’s a pretty big “if,” of course since with rare exceptions, our futures are unknowable. As readers of the piece will discover, there is a fair bit of personal anecdotes there, which is hard to avoid in a beat known as “Personal Finance.” As the column notes, we’ve written before that in theory it makes sense to delay CPP as long as possible, since monthly benefits are 42% higher than if you took them at 65. And while you can take CPP as early as age 60, you’d pay a 36% penalty to do so compared to taking it at the traditional age 65.

Since experts are all over the place on this one and have valid arguments for either side, it’s interesting that in practice very few Canadians actually wait till age 70 to start their CPP, even if it is an inflation-indexed guaranteed-for-life annuity. Government stats show age 60 is the single most popular option: according to the federal government’s 2016 data, of the 312,251 who began collecting CPP that year, 126,954 did so right at age 60, with the second most popular start date being age 65, when 93,460 started to collect. Only 4,844 waited until 70.

The balanced case for the traditional age 65

As I relate in the MoneySense piece, I still haven’t started to collect CPP myself, even as my 65th birthday looms this coming April. Continue Reading…

Retired Money: How to boost retirement income by 50%

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PUR Investing’s Mark Yamada

My latest MoneySense Retired Money column looks at an academic paper written by two Canadian investment pros, which explains how retirees can boost retirement income by as much as 50%. You can find it by clicking on the highlighted headline here: How to boost your retirement income by 50%.

In the recent Fall issue of the Journal of Retirement, PUR Investing Inc. president and CEO Mark Yamada and colleague Ioulia Tretiakova, the firm’s director of quantitative strategies, published a paper titled “Autonomous Portfolio: A Decumulation Investment Strategy That Will Get You There.” Click here for a summary.

Yamada and Tretiakova observe that the combination of rising life expectancy, minuscule interest rates and declining availability of employer-sponsored Defined Benefit pension plans is making retirement an anxious proposition, especially for the Baby Boom generation that is even now starting to storm the barricades of Retirement: 10,000 Baby Boomers retire every day in the United States, and roughly 1,000 a day in Canada.

Little wonder that one study (Allianz 2010) found 61% of those aged between 45 and 75 were more afraid of running out of money than of dying! Sure, you can decide to work a little longer, which lets you save more and cuts down the years you’ll need to withdraw an income, but there’s a limit to how long you can work (or find willing employers or clients). Ultimately, health and time are not on your side!

The full article describes Yamada’s Decumulation Investment Strategy, which is designed to let retirees better manage both retirement income and the probability of ruin.

Dynamic Constant Risk & Spending Rules

Unfortunately, the investment industry relies on historical risk and return data to project future returns, somewhat like navigating a car by peering through its rear-view mirror. Yamada aims to keep portfolio risk constant by reducing portfolio risk when market volatility rises and to increase portfolio risk when volatility falls (hence the term DCR, which stands for Dynamic Constant Risk). Continue Reading…

Large taxable foreign portfolio? Watch $100K and $250K thresholds for CRA’s T1135 form

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If you’re a Canadian investor with a large taxable foreign portfolio, you need to be aware of your cost base, since exceeding $100,000 of so-called Specified Foreign Property (SFP) has to be reported to the Canada Revenue Agency.

This is examined in my (monthly) High-Net Worth column for the Globe & Mail Report on Business which was published online on Friday and was in the physical paper Wednesday, Nov. 15. You may be able to retrieve it by clicking on the highlighted headline: Pay Close Attention to Your Foreign Assets to Avoid Tax Troubles. (Depending on how often you access the site, access may be restricted to subscribers. I’ve summarized the main points below.)

If you file your own taxes, you may have noticed an innocuous looking “box” you may or may not tick each year that ask whether you own “Specified Foreign Property.” If you have a cost base of more than $100,000 of SPF you have to tick that box and fill out a CRA form called the T1135. For most Canadian investors the relevant investments will probably consist primarily of individual US stocks, ADRs and/or foreign equity ETFs trading on US and other foreign stock exchanges.

There is also a higher threshold of $250,000 you also should be aware of because this entails even more detailed reporting and paperwork, and the article suggests you may wish to avoid reaching that higher threshold. The $100,000 and $200,000 thresholds are per individual, not household, and again, it’s based on cost base not current market value.

Failure to comply can entail serious penalties.

How to stay below the threshold and still have foreign content

If you would rather not deal with more CRA paperwork and capital gains hassles, I’d argue you should try to stay below the $100,000 threshold, in which case you don’t have to tick the box on your tax return. Continue Reading…

CPP will be there for future generations, CPPIB head reassures Advocis

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CPPIB president and CEO Mark Machin

My latest Financial Post blog looks at the misplaced perception that the Canada Pension Plan (CPP) might not be there for future generations. Click on the headline to retrieve the full article: No reason to fear CPP’s stability, CEO Machin says, but people do it anyway.

Mark Machin is president and CEO of the Canada Pension Plan Investment Board (CPPIB.)  Speaking Tuesday to financial advisors attending Advocis Symposium 2017 in Toronto, he said “unlike virtually every other industrial country in the world,” Canada “has solved its national pension solvency issues.”

While you could argue that even America’s Social Security system is not solid for the next generation of American retirees,  the CPP is on a solid actuarial footing. Canada’s chief actuary says CPP is sustainable over 75 years, assuming a 3.9% real [after-inflation] rate of return: CPPIB’s 10-year annualized real rate of return is 5.3%.

Despite this, many Canadians — and perhaps some of their advisors — continue to profess their belief that the CPP won’t be around for them by the time they retire. 64% believe either that CPP will be out of money by the time they retire, or don’t know whether it will be there to pay them in retirement, Machin told Advocis.

Half of retirees greatly rely on CPP

However, in practice, Canadians tend to have more faith in the CPP than they claim: 42% of working-age Canadians expect to rely on the CPP when they retire (up from just 13% 15 years ago). In 2016, more than half of Canadians who are actually receiving CPP said they rely “to a great extent” upon it.

Continue Reading…