In Canada, there are four main sources of retirement income – Registered Retirement Savings Plans (RRSPs), Tax-Free Savings Accounts (TFSAs), Old Age Security (OAS) and the Canadian Pension Plan (CPP).
Depending on when you begin withdrawing funds from these sources, and whether you are working full time, part-time or are fully retired, the after-tax income of $100 of income will vary greatly from one taxpayer to another.
As a result, determining when you should start withdrawing funds and how you should structure your income for retirement can seem daunting. To help you on your way to maximizing income and minimizing taxes, the Canadian Government has designed a calculator to assist taxpayers with just this.
The Canadian Retirement Income Calculator provides you with retirement income information, including the Old Age Security (OAS) pension and the Canada Pension Plan (CPP) retirement benefits, and will estimate your retirement income.
Understanding the difference between the four sources of retirement income
RRSP – A retirement savings plan that is opened by the taxpayer. Contributions made to your RRSP can be deducted from your income to reduce taxes. When amounts are withdrawn, taxes become due when a payment is received from the plan. Amounts can be withdrawn from an RRSP at any age, however, at the age of 71, the account must be converted to a Registered Retirement Income Fund (RRIF), used to buy an annuity and/or taken out in cash.
TFSA – An investment account that allows you to earn interest income tax-free. Unlike an RRSP, funds placed in a TFSA are taxed at the source. Funds can be withdrawn at any age.
CPP – A monthly taxable benefit that is used to replace part of your income during retirement. Contributions are made by you and your employers from the time you turn 18 until 70 years of age. There are very few situations in which this contribution would not be made. You can begin withdrawals anytime from age 60 to 70. The longer you wait to receive payments, the greater the monthly amount received.
OAS – A monthly payment available to seniors 65 and older who meet various requirements set forth by the Canadian government. Unlike CPP, the funds for this retirement income tool are funded by tax revenues and is not paid into by you or your employer. You can begin withdrawals between the age of 65 to 70. The longer you wait to receive payments, the greater the monthly amount received.
Using the calculator
The calculator takes approximately 30 minutes to use. To maximize the results of the calculator, it is recommended that you have access to your CPP Statement of Contributions, financial information about your employment pension, recent RRSP statements, and statements of other savings which provide ongoing monthly instalments during retirement, which can include survivor pensions or annuities.
Using your gender and year of birth, the calculator will determine your approximate life expectancy, or you can manually enter the age at which you would like your retirement income to stop.
The calculator will also require your current annual income and your yearly retirement goals. Once you have entered all of the applicable information, you can then adjust the inputs to quickly determine the effect of various scenarios, such as withdrawing CPP later, working longer or stopping retirement income at a different.
It is important to note that the results of this calculator are rough estimates. For financial advice on your specific situation, it is highly recommended that you speak to a professional chartered accountant such as Koroll & Company. To further discuss your retirement saving and withdrawal plans, please contact us today.
