10%20-%20Retirement%20Savings%20and%20Other%20Special%20Income

10%20-%20Retirement%20Savings%20and%20Other%20Special%20Income

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Chapter 10 – Retirement Savings and Other Special Income Arrangements
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Planning for Retirement Minimal benefits are available to all taxpayers from Old Age Security Canada Pension is only paid to former employees and individuals reporting business income who contribute Above and beyond these two sources of income, there are some savings plans that will provide additional benefits – Registered Retirement Savings Plans (RRSP) – Registered Pension Plans (RPP) – Registered Retirement Income Funds (RRIF) – Deferred Profit Sharing Plans (DPSP) – Tax Free Savings Accounts (TFSA) Our focus will be on RRSP’s with some discussion of RPP’s
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The Basic System for Retirement Savings • Savings in RPP’s and RRSP’s are deductible for tax purposes when an amount is contributed to the plan by the taxpayer. • Employer contributions to an RPP are not considered to be taxable benefits. • In addition, the plans earn income tax free • At retirement, funds are withdrawn from the plan gradually over a number of years, and taxed at the time of withdrawal (usually at this point in life the taxpayer is in a lower tax bracket) • Retirement savings have an annual limit that is consistently applied
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Example • Contribute $5,000 per year to an RRSP for 30 years with an annual rate of return of 10%: – Funds accumulated = $822,470 • Contribute $5,000 per year to a non - registered (taxable ) savings plan with an annual rate of return of 10% (tax rate = 45%) – Funds accumulated = $199,198
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Benefits of RRSP contributions Tax deductibility Tax free compounding Contribute as early as possible in the year to maximize the benefits – Contributions for 2010 can be made anytime from January 1, 2010 to 60 days after December 31, 2010. – It has been demonstrated that if contributions are consistently made at the beginning of the year, funds accumulated can be 10% higher than if contributions are made at the end of the year. Taxpayers may have lower tax rates after retirement Taxpayer will be eligible for pension tax credit of $2,000
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Two Types of RPP’s • Defined Benefit – Plan sponsor agrees to provide a specific benefit on retirement, usually a % of income based on years of service. – The employer makes the necessary contributions, and often the employee contributes some as well • Money Purchase – Defined Contribution – Employer agrees to make specific contributions, and employee may make contributions as well, but no guarantee is given as to the amount of the retirement benefit that will be paid.
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Two types of plans • Although the term is not applied to RRSP’s, DPSP’s and RRIF’s, they are all: – MONEY PURCHASE PLANS • Some of the complexity in this area results from trying to keep a level playing field between Defined Benefit and Money Purchase plans.
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RRSP’s • A trust with the individual as the beneficiary, and a financial institution acting as the administrator. • If the plan is registered, contributions to
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This note was uploaded on 01/31/2011 for the course MOS 4462 taught by Professor Ann during the Fall '10 term at UWO.

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10%20-%20Retirement%20Savings%20and%20Other%20Special%20Income

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