RRSPs, RRIFs, TFSAs, PPPs, critical illness insurance, long-term care insurance, high-limit disability insurance, life insurance, joint-and-last-to-die insurance, charitable donations at death—no wonder we get so tired as we get older! TaxLetter columnist and insurance adviser Mark Halpern, helps to sort it all out. Mark can be reached at WEALTHinsurance.com
Whenever you go on a vacation, you always lock your doors and buy trip cancellation insurance, common-sense precautions that protect your property and well-deserved vacations. But what about your retirement savings? Don’t they deserve protection too?
Annual RRSP ritual
By this time of year, most readers have made their annual Registered Retirement Savings Plan (RRSP) contributions, filed away the papers and won’t even think about those savings until contribution crunch time next year or when they’re ready to access those funds.
Back in the ‘good old days’ many people worked at the same job until they were 65, when they received a defined benefit pension and the fabled gold watch. Today, fewer than 4 in 10 Canadian employees are members of a private pension plan, adding more strain on the need for a strong RRSP.
Living longer while unemployed
The need to stash away money for retirement is even more important when you look at rising life expectancy figures. People used to retire and live just a few more years. For the total Canadian population, life expectancy is now projected to be 79 years for men and 83 years for women. The lucky ones with ‘good genes’ may end up in the growing cohort of people over 100, the fastest-growing age group in Canada, last estimated to have jumped by more than 40 per cent from 2011 to 2016. Retirement can now last several decades—and that’s a long time to be ‘unemployed’.
Not everyone realizes the importance of an RRSP. Statistics Canada reports that between 2000 and 2013, the number of Canadians using RRSPs dropped by 16 per cent to 4.2 million and the total value of annual contributions dropped by 26 per cent to $22.5 billion. The reason: fewer 25-to-54-year-olds were making contributions. Some Canadians are even withdrawing funds from their RRSPs before retirement, often to help buy a house, but cutting down on the amount of funds that can work to grow their retirement.
RRSP tax bite
For many people, RRSPs still represent the best way to save for retirement, often resulting in a tax refund along the way as an incentive to save. The RRSP funds grow over the years, free of income tax, if only temporarily. When you start to withdraw the funds (at retirement), you pay the income tax, presumably at a lower tax bracket than when you made the original purchase.
Many people don’t know that RRSP savings pass tax-free to a surviving spouse, but if you are divorced, single or widowed, Canada Revenue Agency reduces your savings with a 54 per cent tax bite. It’s a painful lesson I had to share with a 70-year-old single client not too long ago. He had accumulated $2.8 million in a Registered Retirement Income Fund (RRIF). He was aghast to learn the government would collect $1.3 million in taxes on his death.
As we all know, life happens—and not always in a positive way.
Aside from the ultimate tax liability, realizing our retirement goals can be very difficult if unfortunate life events develop along the way, so taking responsibility for your own retirement needs should be addressed sooner, not later.
You should consider a Critical Illness insurance policy that pays up to $2 million following the diagnosis of any one of more than two dozen conditions, including heart attack, stroke, cancer and bypass surgery. A healthy person now contributing $500 a month to their RRSP can reduce that to $400 a month and use the other $100 for critical illness coverage. The difference won’t appreciably affect the final RRSP, but it will definitely make a welcome difference in helping the person if he or she falls ill.
Arranging Long-Term Care insurance is another defensive strategy. With cost of long-term care in a nursing home now ranging from $4,000 to more than $10,000 a month, hard-earned retirement savings can deplete quickly. Around the clock home care is even more expensive.
Despite the growing need for the product as baby boomers cross the 65+ threshold, fewer than 25% of all insurance advisors have ever sold a long-term care policy, and many tier-one insurance companies have left the market.
However, a large cheque provided by a critical illness policy can be a lifeline for someone who becomes ill. In addition, the optional Return of Premium rider will see all the premiums returned if the client does not make a claim.
High-limit disability insurance is now available with coverage of up to $150,000 a month or $2 million a year, all of it non-taxable.
One of the best ways to protect your retirement savings is to buy a life insurance policy. It is truly the most tax-effective and cost-effective financial instrument available today, and enjoys unique treatment under the Income Tax Act. Not only does life insurance flow to your beneficiaries completely tax free, it also bypasses wills and probate fees.
Its biggest benefit, by far, is that it provides financial security for your family and covers your tax liabilities. If you are in business, it can underpin your shareholders’ agreement and guarantee payment to your family for your shares in a co-owned company when you die.
Married couples should consider inexpensive joint-and-last-to-die insurance to fund the ultimate tax liability that will occur on the second death.
An RRSP also allows you to name beneficiaries. If you have planned for your non-registered assets or insurance to go to your children, you might want to think about naming a charity as the beneficiary of your RRSP/RRIF.
Charitable donations at death can help to protect the value of your RRSPs because the charitable receipts issued will help reduce or eliminate estate taxes.
You may also want to think about buying a life insurance policy that designates a charity as the owner and beneficiary of the policy. So, someone could take out an additional $50,000 a year from their RRSP/RRIF and make a charitable donation with that money. This will eliminate the taxes due on the withdrawal and at the same time reduce the amount of taxes that would be going to the government on their death.
Maybe you would prefer taking that $50,000 a year and buying a life insurance policy valued at $1 million (assuming age 70). That money would be used to pay for the premiums and that would be considered a charitable donation. That donation will then eliminate the person’s taxes on the RRIF withdrawals.
Personal Pension Plan
The obvious way to optimize your retirement savings is by putting away as much as you can, but RRSPs have fairly low contribution limits ($26,230 for 2018).
Business owners and incorporated professionals should consider getting a Personal Pension Plan, (PPP) instead.
It allows you to save far more than allowed under current RRSP rules while at the same time saving taxes and enjoying an expanded level of creditor protection.
A PPP acts as a true pension plan, providing security in that you know how much you will receive every year under its defined benefit component. But it also gives you the option of taking the defined contribution plan route, which refers to the ‘defined’ amount you contribute to the plan every year. According to Canada Revenue Agency rules, you can switch every year between the two kinds of components depending on your cash flow needs in your business.
One of the big benefits of a PPP is that you can also deposit much more into it than you would in a traditional RRSP—as much as 65% more, depending on your T4 income and years of service.
A recent case
Sheila, age 55, owned a distribution company incorporated 10 years ago. She has already saved $285,714 in RRSPs and plans to continue making the maximum contributions each year until she turns 65. If she stays in a regular RRSP she will accumulate $1,570,905 by age 65. But if she chooses the PPP strategy with its substantially higher annual contributions, she will accumulate $2,272,000 at 65—that’s 45% more than if she had used RRSPs to save for retirement for the same level of risk.
Not a DIY project
Don’t do it alone. Regardless of how you save for your retirement, get help now from experienced professionals to deal with tax matters, insurance issues and legal issues. With proper planning in place, your lifestyle can be maintained, your ultimate tax liability minimized, and the unfortunate bumps along the way won’t derail your plans. Our team of experienced advisors is available across Canada. Call us for a consultation, we’d love to help.
Mark Halpern is one of Canada’s top life insurance advisors, a Certified Financial Planner (CFP), Trust and Estate Practitioner (TEP) and CEO of WEALTHinsurance.com®. He can be reached at 416-364-2929, toll-free at 1-800-566-2001 or Mark@WEALTHinsurance.com.
This is an edited version of an article that was originally published for subscribers in the April 2018, issue of The Taxletter. You can profit from the award-winning advice subscribers receive regularly in The Taxletter.
The TaxLetter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846