Chapter 14 Questions

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Chapter 14 Retirement Savings Planning Review questions 1. What is YBE? What are pensionable earnings? What is the YMPE? The year’s basic exemption (YBE) is the first $3500 of annual income. Pensionable earn- ings refers to the amount of income you earn between the YBE and the year’s maximum pensionable earnings (YMPE). The year’s maximum pensionable earnings (YMPE) is the upper limit of your earnings that is subject to CPP contributions. 2. What is a defined contribution pension plan? In a DCPP, who makes the investment deci- sions? Defined-contribution pension plans are employer-sponsored retirement plans where the contribution rate, not the benefit amount, is based on a specific formula. The employee can decide how you want the money to be invested and whether to change your invest- ments over time. 3. What is a TFSA? What are the similarities and differences between RRSPs and TFSAs? A TFSA is a registered investment account that allows you to purchase investments, with after-tax dollars, without attracting any tax payable on your investment growth. Similar to RRSPs, unused contributions can be carried forward to the next year and the growth on contributions is tax deferred. Unlike RRSPs, contributions into a TFSA account are not tax deductible, withdrawals from a TFSA are tax-free, and when you make a withdrawal one year, you can recontribute the money you withdrew the following year. With RRSPs, once you make a withdrawal, you cannot make up for it by recontributing the amount withdrawn at a later date, unless you are making the re-contribution to pay back an HBP or LLP withdrawal. 4. What is a locked-in retirement account (LIRA)? A locked-in retirement account (LIRA), also known as a locked-in RRSP in some juris- dictions, is a private pension plan that is created when an individual transfers vested money from an employer-sponsored pension plan. The main purpose of a LIRA is to pro- vide an opportunity for employees who leave a company pension plan to take the value of their pension plan assets with them. Individuals who leave most provincially regulated pension plans can transfer their pension assets to a LIRA. Individuals who leave a feder- ally regulated pension plan and some provincially regulated pension plans can transfer their pension assets to a LRSP. Question 1 Collette is an employee of Dynamex Industries Inc. and earned $53 000 in 2020. How much will her employer deduct in CPP contributions based on an employee contribution rate of 5.25%? The YMPE and YBE for 2017 are $58 700 and $3500, respectively. Her employer will deduct $2,598.75 in CPP contributions. Calculated as: = (The lower of annual income or YMPE − YBE) × 5.25 percent = ($53 000 − $3,500) × 5.25 percent = $2,598.75

Question 2 Lloyd and Jean have no retirement plan at work, but they contribute a total of $4000 each year to an RRSP. They are in a 30% marginal tax bracket. What tax savings will they realize for there contributions annually? Lloyd and Jean will each save $1,200 in taxes: $4,000 × 30% = $1,200 Question 3 In need of extra cash, Troy and Lilly decide to withdraw $8000 from their RRSP. They are in a 30% marginal tax bracket. What will the tax consequences of this withdrawal be? Troy and Lilly will have to pay ordinary income taxes of $2,400 on the withdrawal, calculated as: Ordinary income tax = $8,000 × 30% = $2,400

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