Pension Income Splitting can dramatically lower taxes for senior couples considered as a family unit
The latest instalment of my MoneySense Retired Money column is now available: click on the highlighted text to access the full version of the column: Pay Less Tax with Pension Income Splitting.
As I note, It’s hard to believe but the great boon of pension income splitting has now been available to Canadian retirees for a full decade. Coupled with the 2009 introduction of TFSAs, these two tools have certainly been a welcome addition to the arsenal of retirees and semi-retirees.
Pension splitting can generate many thousands of dollars in additional after-tax income for retired couples, particularly if – as is often the case – one of them enjoys a generous defined benefit (DB) pension and the other does not. Pension splitting is based on the fact that Canada’s graduated income tax system imposes far higher rates of tax on big earners than on modest or non-existent earners. Pension splitting can result in a highly taxed income and a low-taxed one being merged (conceptually speaking) into what amounts to a modest mid-level amount of tax for the couple as a whole, putting thousands of extra dollars into the family’s collective pocket each year.
The tax benefits vary with the marginal tax rates of both spouses. With pension splitting, if one spouse has no pension and the other has a $60,000 pension the couple as a whole ends up being treated exactly like a couple with two $30,000 pensions. The bonus is that both spouses can claim the $2,000 pension income s and the higher-income spouse may no longer be subject to clawbacks of Old Age Security.
Vanguard Investments Canada Inc. has announced that four new domestic fixed-income ETFs began trading on the TSX today, doubling a lineup that previously included a couple of short-term bond index ETFs, an aggregate bond index ETF and two currency-hedged foreign bond ETFs.
The new funds add coverage to government and corporate bonds, long-term bonds, and to domestic short-term government bonds. The full release is here on Canada Newswire. Here are the names, ticker symbols and Management fees of the four new ETFs:
ETF
TSX Symbol
Management Fee1
Vanguard Canadian Corporate Bond Index ETF
VCB
0.23%
Vanguard Canadian Long-Term Bond Index ETF
VLB
0.17%
Vanguard Canadian Short-Term Government Bond Index ETF
VSG
0.18%
Vanguard Canadian Government Bond Index ETF
VGV
0.25%
These four new ETFs round out a list of domestic fixed-income ETFs that also include the Canadian Aggregate Bond Index ETF (VAB), the Canadian Short-term Bond Index ETF (VSB), the Canadian Short-term Corporate Bond Index ETF (VSC) and two foreign (US and global) bond index ETFs hedged back into the Canadian dollar (VBU and VBG respectively). You can find the full list, including the four new products, here. (Select Fixed Income as the asset class to zero in on the full list of nine bond ETFs.)
In the press release, Vanguard Canada head of product Tim Huver said “These ETFs provide the flexibility to position portfolios along the yield curve and take advantage of targeted exposure to corporate and government bonds.”
Over at MoneySense, my latest Retired Money column has been published, and it looks at the closely related topic of LIRAs (Locked-in Retirement Accounts, which have been termed “the RRSP’s less flexible cousin.” You can find the full column by clicking on this highlighted headline: Unlocking the Mystery of LIRAs.
In a nutshell, LIRAs are also known in some provinces as Locked-in RRSPs, which is exactly what they are. Unlike regular RRSPs, from which you can withdraw funds (and pay tax) if you need it at any time, LIRAs generally prohibit you from making any withdrawals before 55. Granted, when you’re younger that prohibition — illustrated above as a locked piggy bank — may seem frustrating but the idea is to protect our future retired selves from our current “tempted to spend it all” current selves.
As TriDelta Financial wealth advisor Matthew Ardrey told me, you’re going to see a lot more about LIRAs in the coming years. Whether you’re leaving a classic Defined Benefit pension plan or a more market-tied Defined Contribution pension plan, the job market these days is in such flux that a lot of people are going to have to start learning about what happens when you leave an employer pension plan earlier than you might once have envisaged.
LIRAs will multiply as Boomers reach Findependence
In the case of leaving an employer that provided you with a DB pension, you’ll be getting a lump sum based on the so-called “Commuted Value” of the pension at the time you leave (whether voluntarily or due to corporate layoffs or restructuring). I suggest that those who value the certainty of future DB pension payments plan eventually to annuitize such plans, likely the end of the year you turn 71. Continue Reading…
The TFSA and an expanded CPP means Millennials will depend less on RRSPs than the Boomers did
My contribution to the Financial Post’s first RRSP special report of the season can be found by clicking on this headline: For Boomers, the RRSP decision was easy but for Millennials, things are a little more complicated. The piece, which also appeared on page FP 10 of Wednesday’s print edition, recaps the three big advantages of RRSPs, articulated by regular Hub contributor Adrian Mastracci.
As baby boomers, both my wife and I have maximized contributions to our RRSPs almost from the moment we entered the workforce in the late ’70s (actually, in my case, only since 1984, when I rolled over a Defined Benefit pension into my first RRSP). And with no employer pension plan, my wife has continued to maximize her RRSP, to the point some of my sources tell me it’s time to stop, if we don’t wish to be subjected to onerous taxations and OAS clawbacks once we reach our 70s.
As for Millennials, the FP piece makes the argument that the Millennials enjoy two things the Boomers did not have for most of their investing careers: the Tax-free Savings Account (TFSAs, the Canadian equivalent of America’s Roth plans), and second, the newly expanded Canada Pension Plan or CPP.
As I noted in a Motley Fool special report in the fall, by the time the expanded CPP fully kicks in around the year 2065, someone who qualifies for maximum benefits and waits till 70 to receive them could get as much as $2,356 a month just from CPP, or $4,712 a month for a qualifying couple. Add in a giant untaxed TFSA and that might be all they’d need in retirement: assuming this high-saving couple maximized TFSA contributions at $5,500 a year (plus any inflation adjustments to come) from age 18 on.
To be sure, the eternal (well, eternal since TFSAs were introduced in 2009) question of TFSA, RRSP or both will depend on earning levels and tax brackets, which the FP article goes into in some depth. And it also bears mentioning that the TFSA advantage would be almost twice as compelling if the Liberal government had not acted to cut back on the $10,000 TFSA limit we enjoyed one year back to the current inflation-adjusted level of $5,500. So as it stands, high earners have roughly four times as much annual RRSP contribution room as they do for TFSAs, which is a pity.
My personal inclination is to maximize BOTH the RRSP and TFSAs, which certainly should be possible if you’ve eliminated all forms of consumer debt. Most dual-income couples should be able to do both, in my view, although of course if one of them is taking temporary stints outside the workforce (perhaps for child-raising), income-splitting practices like using spousal RRSPs may make sense.
Motley Fool blog on possible ban of trailer commissions
Wealthsimple Black is aimed at investors who have accumulated at least $100,000 in assets with them and brings down the previous annual management fee of 0.5% to 0.4%: a threshold previously reserved for those with $250,000 invested in the automated online investment service (popularly known as Robo Advisers).
The new “premium” service includes personalized financial planning, tax-loss harvesting, tax-efficient accounts and access to more than a thousand airline lounges around the world.
The company now calls the previous version of the service available to investors with less than $100,000 “Wealthsimple Basic.” It charges the 0.5% management fee but manages the first $5,000 for free, and provides automatic portfolio rebalancing and dividend reinvestment, plus “on-demand” advice from portfolio managers.
Wealthsimple is largely a company founded by and targeting Millennials but the new premium service makes it clear it won’t say no to more affluent investors, including soon-to-retire Baby Boomers who are shifting from wealth accumulation mode to so-called Decumulation. In a press release, Wealthsimple founder and CEO Michael Kitchen (pictured above) made it clear the company is now targeting not just young beginning investors but “all investors, no matter how far along they are toward reaching their financial goals.”
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