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Retired Money: RRSP must start winding down after you turn 71 but TFSA is a tax shelter that lasts as long as you do

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My latest MoneySense Retired Money column has just been published and looks at the twin topic of RRSPs that must start to be converted to a RRIF after you turn 71, and the related fact that the TFSA is a tax shelter you can keep adding to as long as you live. You can find the full column by clicking on the highlighted headline: How to make the most of your TFSAs in Retirement.

Unlike RRSPs, which must start winding down the end of the year you turn 71, you can keep contributing to TFSAs for as long as you live: even if you make it past age 100, you can keep adding $6,000 (plus any future inflation adjustments) every year. Also unlike RRSPs, contributions to Tax-free Savings Accounts are not calculated based on previous (or current) year’s earned income.  Any Canadian aged 18 or older with a Social Insurance Number can contribute to TFSAs.

Once you turn 71, there are three options for collapsing an RRSP, although most people think only of the one offering the most continuity with an RRSP; the Registered Retirement Income Fund or RRIF.  More on this below but you can also choose to transfer the RRSP into a registered annuity or take the rarely chosen option of withdrawing the whole RRSP at one fell swoop and paying tax at your top marginal rate.

Assuming you’re going the RRIF route, all your RRSP investments can move over to the RRIF intact, while interest, dividends and capital gains generated thereafter will continue to be tax-sheltered. The main difference from an RRSP is that each year you must withdraw a certain percentage of your RRIF and take it into your taxable income, where it will be taxed at your top marginal rate like earned income or interest income. This percentage start at 5.28%  the first year and rises steadily, reaching 6.82% at age 80 and ending at 20% at 95 and beyond.

Some may be upset they are required to withdraw the money even if it’s not needed to live on. After all, you’re gradually being forced to break into capital, assuming you abide by some version of the 4% Rule (see this article.)

in 2020 only, you can withdraw 25% less than usual in a RRIF

For 2020 only, one measure introduced to cushion seniors from the Covid crisis was a one-time option to withdraw 25% less than normal from a RRIF; so if you turned 72 in 2020 you can opt to withdraw 4.05% instead of 5.4%. Continue Reading…

Study: Coronavirus Pandemic creating Tax Problems that could get worse in 2021

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By Mike Brown, LendEDU

Special to the Financial Independence Hub

Americans struggling to repay their 2019 taxes in the midst of a recession has been just another issue to deal with during the coronavirus pandemic.

Recognizing this, the Internal Revenue Service (IRS) actually extended the filing and payment deadline for 2019 tax obligations from April 15, 2020, to July 15, 2020.

The extension may have temporarily stopped the bleeding, yet there’s a looming tax debt crisis that has the potential to boil over in 2021 when 2020 taxes are due.

That’s because millions of Americans took to relying on unemployment benefits, retirement funds, or stock sales to stay afloat amidst the pandemic recession.

All of those things could lead to a heavier tax obligation in 2021, and with many people still out of work and struggling to get by, the country could be looking at staggering tax debt numbers next year.

The U.S. tax gap (total outstanding tax debt) currently hovers around $400 billion, but that figure could approach crisis levels after next year’s tax season.

To capture the struggles from the 2020 tax season and also the fears regarding the 2021 tax season, LendEDU surveyed 1,000 adult Americans to better understand what the average taxpayer has been dealing with during these unprecedented times.

Observations & Analysis

All data is based on an online survey of 1,000 adult Americans commissioned by LendEDU and conducted by research firm Pollfish. The survey was conducted on December 1, 2020. For some questions, the answer percentages may not add up to 100% exactly due to rounding.

17% of Americans laid off because of Pandemic unable to pay all 2019 Taxes

As mentioned above, the IRS extended the deadline to pay 2019 taxes by three months given the financial hardships experienced by many as a result of the coronavirus pandemic and recession.

However, paying all taxes owed by the July 15th deadline was still impossible for many Americans, especially those who have lost jobs due to the pandemic.

Amongst respondents who have lost their jobs during the coronavirus pandemic, 17% were not able to pay their 2019 taxes on time and in full.

Many still haven’t filed Tax Returns

Even if you are unable to fully pay all tax obligations by the filing deadline during any given year, you should always file your tax returns on time.

When dealing with the IRS, a failure-to-file penalty is much worse (5% of unpaid taxes for each month your tax return is late, up to 25%) then a failure-to-pay penalty (.5% of unpaid taxes for each month you don’t pay, up to 25%).

Yet still, data from our survey found many Americans that couldn’t pay all their taxes on time also didn’t file on time.

32% of taxpayers who couldn’t pay all 2019 taxes on time didn’t file their taxes by July 15th either. Even worse, 72% of these taxpayers who missed the July 15th filing deadline still have yet to file their tax returns for 2019, which could lead to serious financial and legal troubles.

Amongst respondents who at least have filed their 2019 tax returns despite not being able to fully pay all taxes by July 15th, here’s how many have been able to finally repay all 2019 taxes owed…

 

 

 

 

 

With 53% of applicable taxpayers still having tax debt from 2019, we wanted to see how much they have left…

For American taxpayers that still have some amount of tax debt from the 2019 tax year, the average amount remaining is $3,662.

If you are someone that is currently repaying tax debt, you may want to learn more about tax relief as a possible way to settle or reduce your tax bill.

The data from our survey makes it clear that repaying 2019 taxes has been unusually tough, and mass unemployment brought on by the coronavirus pandemic has been a big reason for the struggles.

But the coronavirus pandemic’s impact on the tax system won’t end in 2020 and likely will be more damaging in 2021 as taxes from this unprecedented year will be owed.

Over half worried about next year’s Tax Debt

The 2021 tax season is shaping up to be a brutal one as the full financial ramifications of the coronavirus pandemic and recession develop. Continue Reading…

Cautiously Pessimistic

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By John De Goey, CFP, CIM

Special to the Financial Independence Hub

If I had a nickel for every time I heard someone say they were ‘cautiously optimistic’ about one thing or another, I’d be wealthy.  This got me to thinking – why do I never hear anyone say they’re ‘cautiously pessimistic’ when invited to prognosticate about the not so distant future?

Seeing as the future is unknowable by definition… and seeing as there’s a strong consensus that caution is an appropriate stance to take when looking forward, why is there near uniformity that this caution should be tempered by optimism?  Where are the cautious pessimists?  For that matter, where are the reckless people (optimists and pessimists alike)?

The financial services industry is prone to Bullshift – where the glass is always half full and the industry will try to convince you of much no matter what the facts are and no matter how dire the circumstances may be.  Think back.  When was the last time you heard an analyst predict a year over year market decline?

Optimistic Realist?

My point here is that I don’t want to be a downer.  Rather, I want to be a realist.  Heck, some people have even called me an optimistic realist.  At any rate, it seems to me that pessimism isn’t particularly well thought of in my line of work.  Continue Reading…

The Evolution of ESG

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Franklin Templeton/iStock

By Preyesh Patel (ESG Analyst, Franklin Templeton Investment Management Limited)

(Sponsor Content)

Environmental, social and governance (ESG) investing has been around in different forms for over three decades now but has really become a key focus for the industry over the past five years. Previously, this kind of investing was considered somewhat niche and exclusionary in approach, focusing on “values” regarding tobacco, weapons and companies working with repressive regimes. Nowadays, acceptance of fiduciary duty, climate change and human rights is a common requirement among investors of all stripes. The flow of capital into ESG also makes it the fastest-growing type of investing across the global marketplace right now.

Pension Planning

The change in attitudes towards ESG was reflected in November when CEOs of Canada’s eight leading pension plan investment managers issued a joint statement on the subject. AIMCo, BCI, Caisse de dépôt et placement du Québec, CPP Investments, HOOPP, OMERS, Ontario Teachers’ Pension Plan and PSP Investments — representing approximately $1.6 trillion in assets under management between them — called for economic growth that was both sustainable and inclusive.

This kind of growth can only be achieved through stronger ESG disclosure standards for companies, they said, allowing investors to better assess their risk exposures. Stronger standards will mean standardization of how data is collected on issues such as diversity & inclusion, human capital and climate change. To achieve this, the pension plan leaders called for the adoption of the Sustainability Accounting Standards Board (SASB) standards, as well as the Task Force on Climate-related Financial Disclosures (TCFD) framework.

Responding to the statement, Tiff Macklem, Governor of the Bank of Canada, expressed how making ESG a priority was the right approach on many different levels.

“A strong commitment to environmental sustainability, diversity and inclusion and good governance principles will not only make our economy and financial system more resilient, it’s also the right thing to do. Leadership from Canada’s financial sector is essential as we focus on building an enduring and more equal economic recovery from the pandemic.”

Finding industry-wide consistency on how to measure ESG performance remains a challenge. The Corporate Reporting Initiative is another example of the various attempts to standardize ESG reporting, but there is still work to be done to ensure that these three letters represent much more than a branding tool.

For us at Franklin Templeton, it means seeking out material ESG insights and incorporating them into our decision-making process in a manner that best fits our investment philosophy.

For example, in its most recent update, the Templeton Global Macro (TGM) team outlined how it applied ESG criteria to its investment processes, focusing on: integration; forward-looking data points; projected “tails,” which signal major ESG shifts; a long time horizon; as well as engagement with policy makers.

Pandemic Impact

For investment teams like TGM, the past 12 months have only increased the need for sound ESG policies. Even before COVID-19, analysis by TGM revealed a decline in the number of countries that showed improving ESG momentum: the pandemic has only worsened this trend. Continue Reading…

The price we pay for investment certainty

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Lowrie Financial/Unsplash: Mark Duffel

By Steve Lowrie, CFA

Special to the Financial Independence Hub

Whether it’s pandemic infections or U.S. presidential elections, investors have been enduring at least the usual, if not higher levels of market uncertainty lately.  As the daily news plays out, I’ve been fielding at least the usual level of questions about how to manage the related market risks.

Two sides to risks and returns

In recent posts, such as going defensive in uncertain times and the vital importance of rebalancing, I’ve reminded readers why investors seeking long-term returns must hunker down during uncertain times and let near-term market volatility have its way as part of their well-planned portfolio.  Because:

Higher investment risk (including market uncertainty) = higher expected returns

I believe most investors intuitively understand this.  And yet, the question keeps coming.  It might help if we think about the same thing, in reverse:

Lower investment risk (including market uncertainty) = lower expected returns

The price of uncertainty

In other words, viewing the same point from a different angle shows us we pay a price either way for the two reasons we invest to begin with:

  1. Accumulating Wealth: If you’re still building lifetime wealth, you may be best served by taking on more market risks and pursuing higher expected returns.  The price you pay for investing more aggressively is being more uncertain whether you’ll achieve your ambitious goals.  As long as you stay put and have time on your side, odds are you will ultimately prevail.  But there is no free lunch in investing, so you never know for sure.
  2. Preserving Wealth: If you’re at or near your lifetime financial goals, you may be best off avoiding market risks and the wider range of uncertain outcomes they create.  Here, you pay a different price.  In exchange for having more certainty about your investment outcomes, you must expect lower returns, and slower portfolio growth.

Lifelong planning

By the way, whether you’re accumulating or preserving wealth isn’t necessarily based just on your age.  It also depends on your goals.  For example, even if you’re in your 20s or 30s, with decades before you retire, you still might focus on preserving some of your wealth to purchase a house within a few years.  Conversely, even if you’re retired, you still might have wealth accumulation goals if you wish to leave a substantial legacy or charitable bequest. Continue Reading…