Retirement / Pension Questions

[Disney Addicted]

I'm working on spreadsheet scenarios and have a couple of qeustions.

Once a person retires and draws a pension, are taxes withheld from the monthly payments like there is on a regular paycheque? Or does that different depending on the company one worked for and how their pension is set up?

Also, same question but for when a person receives their CPP and OAS. Are taxes withheld before receiving the monthly payment?

Thanks!!

 

[starry_solo]

Here's some great information on the CPP website:

https://www.canada.ca/en/services/benefits/publicpensions/cpp/cpp-benefit/after-apply.html

Your CPP retirement pension counts as income and is taxable.

Taxes aren’t automatically deducted. You can ask that federal income tax be deducted from your monthly payments by:

• signing into your My Service Canada Account, or
• completing the Request for voluntary Federal Income tax Deductions CPP/OAS (ISP3520CPP) form and mailing it to us or dropping it off at a Service Canada office

If you do not ask for monthly tax deductions, you may have to pay your income tax each quarter. For more information, contact the Canada Revenue Agency (CRA) Tax Services Office.

 

[bababear_50]

It's like starting a whole new world when you retire.
The past few years have felt so different for me.

I started CPP at age 60 and even though I was still working and collecting a pay cheque.
I went online and requested 15% in taxes be taken off.

Then a couple of years later I retired early from my fulltime job and started my work pension..................
I asked my work pension provider to take off 20% in taxes.
: I also receive a bridge pension as part of my work pension which is payable till I am old enough to receive a OAS ( Old Age Pension). 65 years old.

Biggest mistake I have made so far was earning a higher amount than I thought as a casual staff last year and not having my work take off enough taxes. First time in my life I owe taxes. (well only $850 but still a shock).
When I am in doubt I call my accountant...... he is retiring this year so I need to find a new one.

Lots of little learning curves.
Starry solo listed all the CRA links/websites


Deep breathe and you'll do great Hon.

Hugs Mel

Edited to add:
Learning curve for me was receiving pension cheque once a month when I was used to weekly/biweekly pay cheques.

 

[Disney Addicted]

Thanks @starry_solo. I knew CPP & OAS are taxable income but I wasn't sure if taxes could be deducted at source or if one had to wait until filing taxes and owe a large amount. I'd rather continue having taxes deducted when we retirement. The bit about may have to pay quarterly income taxes if you don't opt for for monthly tax deductions is surprising (versus paying at the usual April tax season). Since we will opt for deducting at source it's a moot issue but I'm curious and may dig into why quarterly later. I checked out the links you gave me and it didn't say. Very helpful links and thank you very much for them!

 

[Disney Addicted]

Hi @bababear_50. Thanks for the info! I'm glad to hear we can request taxes deducted at source off the pension.

My husband's company provides a bridge pension as well. He can retire in 2025 (work until the end of the year); says he plans to stay until age 65; but is considering 61 since he does get that bridge. Say he retires at 61 - we thought the bridge goes away at 65 when CPP + OAS kick in. Since you're receiving a bridge and collecting CPP, does that mean the bridge is really tied into when OAS kicks in, not CPP since people can defer it until age 70?

May I ask what made your decision to start CPP at 60 instead of 65 or 70? I have read a lot of online debates about early/regular/late. Seems to me that taking it at 70 is pushed a lot (in articles). However, many people responding argue taking it earlier is better. I ended up adding a tab in my spreadsheet, creating a mini chart of taking CPP at age 60, 65 and 70 and receiving the funds up until age 90 in each of those 3 columns. If I started at 60 versus 65, I would be 74 before the larger portion received at age 65 catches up to my taking it at 60. If I started at 65 versus 70, I would be 82 before the even larger portion received at 70 catches up to my taking it at 65.

It seems it's a guessing game of health and genetics to me. My mom died early (69). My Dad is 81 and most likely be in his 90's (judging from his parents/relatives). My husband's parents/relatives all died early.

I'd love to hear advice and information from everyone. Especially those "things no one tells you" before you retire.

 

[samsteele]

I'm curious why one would ask CRA to make monthly deductions. Why not keep track of your income, invest in even short term GICs, and then pay your quarterly tax installments. You need to have the most accurate estimate of your annual income as possible to decide if you actually need to make all of those installment payments because if you underestimate your income and fail to make the required installment payments, CRA charges a minimum 10% interest penalty. However, if you inadvertently overpay a little bit, that installment payment is a credit for your personal tax assessment in that tax year. At the moment, there are very good interest rates on even 6 or 9 month GICs. This may not continue depending on Bank of Canada and the economy but right now it's a decent and safer savings vehicle. Instead of asking CRA to take your tax money early, why not hold onto your cash earnings, be proactive and earn interest income? It's not convenient and does turn into a second job but it is an earning potential that is easily realized. Perhaps its a cash flow concern ie not having the cash or worry that you might be short finding the cash to pay CRA the installment payments? It takes some planning and budgeting your income before spending to create a cash slush fund in the best savings interest account you can find, but it's certainly doable to set up and feed that cash account so you can meet your quarterly tax installment payments. If you use an accountant, why not ask them for practical strategies as soon as this busy April tax season is over.

Edited to add: your quarterly installment payments are based on your prior year total income tax payable. So if you suddenly make more money in year 2 than you did in year 1 (eg higher stock dividends due to better market or better investment strategy) but still make all your quarterly installment payments based on that year 1 income, you aren't penalized by any interest penalty. However, your next year's quarterly installment payments will now be higher based on your higher income made in year 2. Clear as mud?

 

[bababear_50]

Hi Hon

My initial decision to take the CPP at age 60 and not 65/70 yrs. was due to loss of my Mom, Dad in their 60's and Brother in his 50's ,,and quite a few Friends in their 50's ,,,,,,, they never lived long enough to received their CPP pensions.
I'd love to know how many (percentage) of Canadian actually live to get their pensions.

Each month I just bank roll the money from CPP into TFSA and then laddered the money every 6 months into TFSA GICS. I am not a big risk taker and GICs are safe for me. (Also no taxes here).

***I was able to pay off my mortgage early due to a gift from my brothers estate which cut down on my monthly
expenses. This played a major role in my ability to retire early.

My Bridge Pension is tied into when my OAS starts,,, by the way I hate the title OAS Old Age Security.
Maybe OAP Older Adults Pension....
I am not eligible for OAS yet......soon.

Hmmmmm .... I have a keen desire to help my sons (three of them) when needed $$$$ and learned this year to think things through before giving/lending money,,, retirement is not the time to be doing this often.

I was also BORED after years of work and ended up going back as a casual .
I love it!

Hugs Mel

How Laddering Works

1. Your money is initially divided into different portions; each portion is invested in a different term at the corresponding interest rate.
2. Once each portion matures, the funds can be used to buy a new GIC (or you can access the money if needed).

Here’s an example:
If you invest $1,000 in a 1-year GIC, earning an interest rate of 5%, all the interest you earn will be subject to tax. You’ll have to claim it as income on your annual tax return.

But if you invest that same $1,000 in a 1-year TFSA GIC, then you will still earn 5% interest and you won’t pay taxes on it.

This keeps a half decent size *slush fund* with no tax for withdrawing out if needed.

 

[mort1331]

It really is a guessing game on when to take CPP. Of course if you live longer its better to wait till 70. But one thing my job has taught me,,,nothing is guaranteed especially longevity. I need to make my own decision soon,,and even though my parents are in their late 80s nothing says I will be that old. Flip a coin,,or ask the wife how long I will be around...lol

 

[migel]

For me, starting CPP at 60 last year was a no-brainer. My potential longevity, coupled with Canada's declining economic stability and uncontrolled government spending, made it an easy decision.

 

[Disney Addicted]

I'm curious why one would ask CRA to make monthly deductions. Why not keep track of your income, invest in even short term GICs, and then pay your quarterly tax installments. You need to have the most accurate estimate of your annual income as possible to decide if you actually need to make all of those installment payments because if you underestimate your income and fail to make the required installment payments, CRA charges a minimum 10% interest penalty. However, if you inadvertently overpay a little bit, that installment payment is a credit for your personal tax assessment in that tax year. At the moment, there are very good interest rates on even 6 or 9 month GICs. This may not continue depending on Bank of Canada and the economy but right now it's a decent and safer savings vehicle. Instead of asking CRA to take your tax money early, why not hold onto your cash earnings, be proactive and earn interest income? It's not convenient and does turn into a second job but it is an earning potential that is easily realized. Perhaps its a cash flow concern ie not having the cash or worry that you might be short finding the cash to pay CRA the installment payments? It takes some planning and budgeting your income before spending to create a cash slush fund in the best savings interest account you can find, but it's certainly doable to set up and feed that cash account so you can meet your quarterly tax installment payments. If you use an accountant, why not ask them for practical strategies as soon as this busy April tax season is over.

Edited to add: your quarterly installment payments are based on your prior year total income tax payable. So if you suddenly make more money in year 2 than you did in year 1 (eg higher stock dividends due to better market or better investment strategy) but still make all your quarterly installment payments based on that year 1 income, you aren't penalized by any interest penalty. However, your next year's quarterly installment payments will now be higher based on your higher income made in year 2. Clear as mud?

@samsteele you bring up a very good point. Thank you. I'm running spreadsheets and estimates on both mine and my husband's finances at retirement. Since I did not work for many years after the kids were born, my CPP will not be very high and my pension with RBC (I left when my first was born) is very very small. Even though I'm working again, it's only been 3 years and this company does not have a pension plan but a group RRSP plan. For me, I do not think I will ask for taxes to be withheld. As of now, my calculations show I will only have an income of just under $20,000/year without touching my RRSP until 71. We have savings and I'm used to dealing with a (complicated, my husband says) spreadsheet budget so it wouldn't be difficult of me to keep track of quarterly payments and rolling GICs. I did not realize such short term GICs existed - thanks! I'll need to go over my husband's more. His income will be much higher in retirement. I can see that working as long as I do the book-keeping. If I become incapacitated, he'll need to switch all his income to withhold taxes as he will not be able to keep track.

Hi Hon

My initial decision to take the CPP at age 60 and not 65/70 yrs. was due to loss of my Mom, Dad in their 60's and Brother in his 50's ,,and quite a few Friends in their 50's ,,,,,,, they never lived long enough to received their CPP pensions.
I'd love to know how many (percentage) of Canadian actually live to get their pensions.

Each month I just bank roll the money from CPP into TFSA and then laddered the money every 6 months into TFSA GICS. I am not a big risk taker and GICs are safe for me. (Also no taxes here).

***I was able to pay off my mortgage early due to a gift from my brothers estate which cut down on my monthly
expenses. This played a major role in my ability to retire early.

My Bridge Pension is tied into when my OAS starts,,, by the way I hate the title OAS Old Age Security.
Maybe OAP Older Adults Pension....
I am not eligible for OAS yet......soon.

Hmmmmm .... I have a keen desire to help my sons (three of them) when needed $$$$ and learned this year to think things through before giving/lending money,,, retirement is not the time to be doing this often.

I was also BORED after years of work and ended up going back as a casual .
I love it!

Hugs Mel

How Laddering Works

1. Your money is initially divided into different portions; each portion is invested in a different term at the corresponding interest rate.
2. Once each portion matures, the funds can be used to buy a new GIC (or you can access the money if needed).

Here’s an example:
If you invest $1,000 in a 1-year GIC, earning an interest rate of 5%, all the interest you earn will be subject to tax. You’ll have to claim it as income on your annual tax return.

But if you invest that same $1,000 in a 1-year TFSA GIC, then you will still earn 5% interest and you won’t pay taxes on it.

This keeps a half decent size *slush fund* with no tax for withdrawing out if needed.

Rolling the money from taking an early CPP into a TFSA is what I am looking at doing as well. I think my husband especially should.

Thanks for the information on laddering savings. It's very good advice from you and samsteele. We have enough saved up that we should start doing it now.

That's good! I'm glad you were able to go back to casual and make it work for you. My husband had a couple of co-workers retire, and they died within a year or two... I read too many times people have nothing to do and just... It made me wondered if I would be bored, but I don't think I will. Just before I started working again, I went from paper scrapbooking to digital (and will never go back!) and feel like I never have time anymore to work on my albums. Plus, I had also just gotten into quilting. I have hoards of fabric and designs of quilts to make and give away, but no time to work on them either. Also, I have the possibilty of dropping to part-time instead of full-time. At the moment I don't think I would want to be part-time for a long time, but I might transition into that for a year or two before retiring completely. We shall see. Easy to plan but maybe harder to do.

 

[Lesverts]

Speak to an accountant. There are a lot of variables and the relative size of your retirement savings is going to have a major impact on what you do. But in general:

If you start taking CPP at 60, you should be in a position to not spend it. Either stash it in an RSP or a TSFA.
Start withdrawing and drawing down RSPs as soon as you hit retirement/65. RSP and RIF are taxable upon death and if there is a substantial amount, you'll be paying in the 40 percent plus tax bracket for much of that money. It is better to withdrawal and maximize your yearly income to the upper limit of OAS and the old age tax breaks/rebates than to have your loved ones potentially be paying hundreds of thousands in taxes from your estate upon death.
If you have 300,000 in there upon death, your estate will be paying 120,000 in taxes. If you have 300,000 in TSFAs and unregistered investments, the TSFA will be subject to no tax, the unregistered will be subject to probate at around 5%. Much different scenario. So a probate bill with fees of around 15,000.

 

[ottawamom]

Timely article from Financial Post on Yahoo about when to claim CPP. Here it is if you're interested Missed CPP opportunities

 

[dancin Disney style]

To the question on why you have to pay quarterly tax installments. I'm a business owner and therefore self employed. I've had to pay quarterly for over 20 years. Basically, they want quarterly payments so that they get their money. If you did not make payments a lot of people would have a very hard time making a big lump sum payment at the end of the year. You would be surprised at how many people are not disciplined enough to save up the appropriate amount. I personally know other business owners that struggle with holding the HST they collect. That also has to be remitted quarterly. So I could only imagine the mess they would get themselves into if they did not make tax payments.

To the question of taking CPP at 60/65/70. You would be advised to take it early if you have a reason to think you will not live to be 80+....health conditions or family history. Taking it early reduces the amount of money you receive monthly. The sweet spot to optimize the monthly payment and long term earnings is the age of 67. However, if you are still working (regardless of age) you would likely loss the money to taxes and in that case you should wait.

I would strongly advise speaking with a financial planner. Dealing with pensions and retirement funds is not a simple process.

 

[ilovetotravel1977]

I can retire without penalty in Dec 2028. I will be just shy of 52. I will have 28 years of service. DH can retire at 55 with 30 years of service. I plan on continuing working until he can retire as that should also give me 30 years. It honestly freaks me out that we could live another 30-40 years after retirement. Will we have enough money? We both have defined pension plans with our employers (Provincial Govt and Bell Canada), TSFA investments, Bell stocks, no RRSPs.

House being paid off is the number one requirement!

I am bookmarking this thread with the CPP and OAS info as we would try to hold off until 70 as well. We have genetically healthy families.