How to account for money in corporate account

Question:

I just signed up for the account and I am playing around with the numbers. I am currently keeping most of my earnings inside my corporation and investing inside the corporation.

Is there a way to measure the growth inside the corporation and the best way to divest in the future or is there an approximate account of how much extra tax I will be paying on withdrawing the money from the corporation so that I can properly account for it?

Answer:

You can enter the value of your corporation in 'Business Ownership' in Other Assets on the Finances page. You can pay dividends from the business and you'll find an entry for dividend income from business ownership on the 'Other Income' tab. The two are associated, so if you sell the business, the dividends will stop in that year.

On the sale of the business ownership, the amount above the small business capital gains exemption will be taxed.

By: RetireWare / Equisoft On 11:26 AM

Continue Reading

Start RRIF Withdrawals at Age 62

Question:

I changed my plan to retire later when I'll be 62 years old. Now it's showing a RRIF withdrawal from age 62. I thought this was illegal - I don't even have a RRIF. Please can you tell me how to sort this out? Previously it was showing withdrawals first from non-reg funds.

I've already set the option under Source of Income under Registered to start withdrawals as late as possible to save on taxes.

Answer:

You can open a RRIF at any age. Check on the Options page to ensure that you selected to start RRIF withdrawals as late as possible. It's on the first tab.

On the Financial Information page on the Registered tab, you have selected purchasing an annuity from a life insurance company under RRSP Options. Is this your intent? If so, the RRSP balance is used to purchase a lifetime income. So it will not work to defer the RRSP. You'd have to change it back to RRIF and it should then only be accessed when you're 71.

By: RetireWare / Equisoft On 11:05 AM

Continue Reading

How to Determine Required Savings

Questions:

I purchased RetireWare to derive an accurate number for annual savings for my wife and I given a set of retirement goals and lifestyle requirements.

I have an account set up under the email above but feel that something isn't quite right with the calculations after playing around with the numbers.

Here are my questions:

1. My wife is currently not working as our kids are young. She plans on starting to earn income again next fall. That income will likely increase again once our 2yr old son goes to school full time in 3 more years. I can't seem to figure out a way to incorporate that graduated income for my wife into the calculations. Can I do that in RetireWare?

2. Our plan was to have an "active" retirement until I hit 75 and my wife hits 65 (ie. 15yrs into our retirement as currently planned in RetireWare) and then switch to a less active retirement. How do I account for a graduated level of retirement expense in RetireWare?

3. It seems that the "Principal Residence" under Financial Information is being double counted for my wife and I. I entered the "Current Market Value" of our house under my wife's profile *and* my profile. Should I be entering it once to avoid double counting it?

Answers:

1. You could add the income under 'Other Income' and can enter up to four periods, but this type is for after retirement and does not allow for saving for retirement. Instead you can enter the average income she'll earn between now and retirement, considering $0 for a coupe of years, a part-time wage after and full-time when the kids are in school full-time.

2. On the Forecast page under 'Retirement income target', there is a section called 'Advanced'. There you can apply reductions or increases to your retirement icnome goal for up to three periods during retirement.

3. Yes you should enter under one spouse or enter 50% of the value under both.

By: RetireWare / Equisoft On 11:04 AM

Continue Reading

Old Age Security Clawback

What is Old Age Security Clawback?

Old Age Security ("OAS") is a social insurance program that provides a basic level of pension income, on application, to anyone age 65 or over who meets residence requirements.
The amount of Old Age Security pension is part of taxable income. OAS is reduced for persons with high income through a recovery provision of the Income Tax Act.

For 2018, the tax recovery applies to persons whose net income exceeds $75,910. For each $1 of income above this limit, the amount of basic Old Age Security pension reduces by 15¢.
Repayment of "clawed-back" OAS pension is made through deductions at source. If net income is more than $75,910, one-twelfth of the total estimated repayment for the year will be deducted from your monthly OAS payments. The estimated repayment is based on your previous year's tax return.

Background

Various sources of income are necessary for a comfortable retirement, including a registered retirement savings plan (RRSP), locked-in retirement account (LIRA), the Canada (or Quebec) Pension Plan, a company pension and non-registered investment income and/or capital.

OAS recovery is based on net income, that is income after deductions. One way to minimize clawback is by earning types of income that have less than a 100% inclusion rate. Another way is by using all possible tax deductions.

Generate Tax-Efficient Investment Income

Income from a company pension or the Canada Pension Plan is fully taxable. There is no flexibility there. However, with a registered retirement income fund (what are RRSPs converted to after age 69), you have the ability to take a minimum withdrawal each year to minimize your net income.

When it comes to investment income from non-registered investments, different types of income are taxed differently. Interest income from Guaranteed Income Certificates (GICs) and term deposits are fully taxed. However, capital gains enjoy a much lower tax rate. While dividend income is taxed at a lower rate after taking into account the dividend tax credit, the "grossed-up" amount actually increases net income and will cause to increase OAS recovery payments.

One strategy is to minimize GICs and term deposits, and instead purchase income funds, that have a lower inclusion rate.

Use Part of your Non-Registered Funds to Purchase an Annuity

Using part of your non-registered funds to purchase an annuity not only provides you with a lifetime stream of income, only a portion of each payment is taxable. This is because a portion of each payment is considered a return of capital and is therefore tax-free. Only the portion that is interest is taxable, and is generally less than half of each payment.

Look for all Available Tax Deductions

Seek professional advice when preparing your income tax return to ensure that you claim all available deductions for your situation.

If you are not yet age 69 and have unused RRSP deduction room, make a final RRSP contribution. You don’t have to take your deduction all at once, you can spread it overtime, even beyond age 69.
For example, a $40,000 deduction taken over 8 years will reduce your net income by $5,000 each year. You get a tax savings of up to about $2,500 depending on your marginal tax rate, and your lower net income may result in an increase in Old Age Security of as much as a $750 per year, if your net income is still above the threshold.

Borrow to Invest

If you have discretionary income, take an interest-only loan. Loan Interest for investment purposes is fully deductible and you use the discretionary to pay the interest. The loan interest reduces your net income dollar-for-dollar, and at the end of the loan, you pay the principal on the loan and keep the after-tax investment income. This strategy can increase significantly the value of your estate.

What is Net Income?

Net Income is Total Income reported on your tax return less certain deductions.
Total Income includes employment income, Old Age Security, Canada or Quebec Pension Plan benefits, pension income, dividends, taxable capital gains, rental income, RRSP income and other revenues.

Deductions include Registered Pension Plan contributions, RRSP contributions, union and professional dues, business losses, carrying charges, interest expenses and other items.

Government of Canada's OAS Repayment Web Page

You can find more information on the Government of Canada website at www.canada.ca by searching "Old Age Security Recovery Payments".

By: RetireWare / Equisoft On 8:30 PM

Continue Reading

Purchasing an annuity with RRSP

Question:

How do I purchase an annuity in 2020 with my my RRSP?

Answer:

There is a section in 'Registered Investments' on the 'Financial Information' page where you can select to purchase an annuity with the proceeds of your RRSP.

By: RetireWare / Equisoft On 5:01 PM

Continue Reading

Asset allocation and sources of income

Questions:

Looking at the Report I have a few questions:

Under Asset Allocation it states “The Investor Profile Questionnaire established that the following portfolio: Security might be the most …”  Do I assume that the RetireWare used a “Security” mix for my investments listed under Finances or will it use the “Selection of Rates in Economic Outlook?”  I deliberately left all RRSPs in the “Finances – Registered Investments – Market Value” as “Cash” so the projected growth would utilize a low return (2.25% as noted on the Assumptions and Disclosures).

Under the “Sources of Retirement Income” it has “yes” next to Personal Residence even though I indicated for both my wife and me “Never” under “Financial Information – Principal Residence – Sell Principal Residence.”  Are the income projections using the value of our personal residence or not?

Answer:

The calculations use the asset allocation basis selected on the 'Asset Mix for Projections' tab on the 'Options' page. You can select an asset allocation based on one of the profiles, the current asset mix, or your own custom allocation.

Since you selected 'Never', there will be no sale taking place. If you had selected a year for the sale but left the personal residence unselected in 'Sources of Retirement Income', then the funds would not be used for retirement.

By: RetireWare / Equisoft On 4:59 PM

Continue Reading

Cash Flow Forecast

Question:

In the Cash Flow Forecast Detailed Data Table, there is a column of data called "Retirement Objective Net". From what I can see it includes the Post retirement expenses that I setup along with special expenses according to the parameters on the "retirement income target" tab.

However I can't seem to reconcile the data in that column against the budget, it is always higher. Can you tell me what data is included in the (net) retirement income objective column?

Answer:

The expenses you entered are in "today's dollars". So if it's payable in. say, 10 years, the annual expenses are increased by the rate of inflation applicable during that period. This is to ensure that your assets can pay for the expenses when they are incurred in the future. Look in the Help file, under Forecast Menu | Retirement Income Target |  Adjustments to Retirement Income. There is more information and an example about the impact of inflation.

By: RetireWare / Equisoft On 4:58 PM

Continue Reading

Saving in a holding company

Question:

You can include the value of a business from which you can pay dividends. You will find this on the 'Other Assets' tab on the Financial Information page. I'm not sure if this addresses what you want to do with a holding company.

I do have a question on how to optimize the plan. I know we have lots of extra cash flow but it doesn't appear to be putting any money into the TFSA or RRSP or Non-Registered where is the excess cash flow going? Can you please advise how I tell the system to "auto direct budget surpluses to savings"?

Answer:

Please note that before retirement, extra cash is assumed to be spent.

After retirement surpluses are saved to the non-registered account and available to cover shortfalls in future years.

If you have excesses before retirement, manually increase your annual savings amount and it will be directed in the RRSP, TFSA and non-registered according to the savings rule you selected on the Forecast page.

By: RetireWare / Equisoft On 4:45 PM

Continue Reading

Increase in Retirement Expenses

Question:

My client is considering selling her home in a few years (let's say 6 years from now when age 75) and we're projecting till age 90. How do we reflect a increase in her cash needs for the remaining 15 years of her life (75 to 90).

I can see where to sell the home, but where can I input a monthly increase in expenses of $500 per month starting in 6 years from now?

Answer:

On the Forecast page, you can enter on the 'Retirement Income Target' tab under 'Special Expenses' a periodic expense starting say in 2021, with frequency 1 (meaning once per year) of $6,000.

Alternatively, on the same tab under 'Advanced' you can increase the budget in percentage terms . If you use this approach, determine the percentage that $6,000 per year is to the retirement income goal.

By: RetireWare / Equisoft On 11:42 AM

Continue Reading

Viewing Detailed Cash Flows

Question:

On the future assets table in the report, the registered assets at age 94 (year 2054) for the surviving client are $240,979.

At that age the client is required to withdraw a minimum 20% which would be $48,200. The investment return is a net 5% or about $12,000 maximum yet the client’s registered assets at the start of the next year are $217,683, which is about $13,000 more than the math would indicate it should be.

The cash-flow forecast for age 94 (2054) shows only $31,711 being withdrawn from the registered assets of $240,979 which is 13% and not 20% as required by CRA. Is there an explanation for this?

Is there something else in ‘registered’ other than a RRIF or a LIF that might distort the figures, like a TFSA?

Answer:

For each spouse on the 'Accumulations' tab on the 'View' page there is at the bottom under 'Your Future Assets - Detailed Data Table' links to pop-up tables that provide the detailed cash flow. You will see that the withdrawals are 20% at age 94.

For investment income, it will be based on the rates of returns selected in the 'Economic Forecast' page (less investment fees), weighted in accordance with the basis selected in 'Asset Mix for Projections' on the 'Options' page.

The summary tables on the results page combine TFSA, LIFs and RRIFs.

The Accumulations and Income Forecast tabs have detailed pop up cash flow tables that show all cash flows.

By: RetireWare / Equisoft On 11:41 AM

Continue Reading

RRIF Withdrawals

Question:

How do I delay RRIF withdrawals to age 71 in the program?

Answer:

On the Options page, select "Start Withdrawals of Registered Investments" and the program will defer the RRIF withdrawals as long as possible.

Please note that if funds are not sufficient to meet the retirement income goal, then the RRIF will be opened before age 71 in order to meet the income goal. So if non-registered (or TFSAs) are not sufficient, reducing the goal will facilitate the deferment of the RRSP to the latest age.

As well, ensure you select 'Use Investment Earnings and Capital' for 'Use of Non-Registered Assets After Retirement' on the same page.

By: RetireWare / Equisoft On 11:39 AM

Continue Reading

Eliminating a Retirement Shortfall

Question:

I ran a plan which advised me that assets were not sufficient and that clients needed $19,500 more in savings each year until retirement.

I input $20,000 more into savings and revised plan came back with:

• Current annual savings: $20,000
• Total required savings: $32,500
• Additional required savings: $12,500

 Can you explain this please and how to get rid of shortfall.

Answer:

On the Forecast page on the Savings tab, you have set maximum savings at 50% of earnings.

That's why the program comes up with $32,500 total annual savings.

Nevertheless, your client, who is 1.5 years away from retirement, and with his spouse already retired, need to fund nearly a $1 million gap.

So no reasonable contributions can help, other disposing of existing assets, for example selling the personal residence at a later point in time.

Note that you have based the projections on their current asset mix on all cash investments for the registered funds and locked-in assets.

Investing in a more diversified mix will generate higher returns for the projections, but they will still significantly fall short.

Maybe you can look at adjusting the income goals and retirement dates, in addition to using a better asset mix or finding other funds for retirement.

By: RetireWare / Equisoft On 11:25 AM

Continue Reading

Use of Various Sources of Income

Question:

Does RetireWare optimize the various streams of income in retirement, i.e. non-registered, registered, etc. for each year to provide the most tax efficient outflows?

Does the software provide cash flow results in after-tax dollars?

Answer:

The program does not do a year-by year optimization. Rather, the procedure for the use of funds followed by RetireWare is to determine whether existing pensions, such as company pensions,
Canada or Quebec Pensions and Old Age Security are sufficient to meet the retirement income objective. If not, RetireWare uses non-registered investment income (and capital until exhausted, if you select that option), then Tax-Free Savings Accounts (TFSA), locked-in RRSPs (including funds from a defined contribution pension plan), and RRSP/RRIFs last. This has the advantage of achieving tax-free compounding of registered investments for as long as possible. RetireWare uses locked-in RRSPs before non-locked-in RRSPs.

The software shows detailed cash flow charts and tables, showing each source of income, income tax payable each year and net income.

By: RetireWare / Equisoft On 11:17 AM

Continue Reading

Detailed Cash Flow Tables

Question:

When I try to view the detailed table for both income and accumulations, nothing comes up. Any suggestions on how to fix?

Answer:

Please ensure your browser doesn't block "pop-up" windows. Or try another browser, such as Google Chrome.

By: RetireWare / Equisoft On 11:10 AM

Continue Reading

Dividend Stream

Question:

Is there a way to create another post retirement income stream of dividends from a holding company and are they treated as eligible or non-eligible for tax purposes?

Answer:

There is only one stream of dividends and they are taxed as eligible dividends. Other temporary streams of income can be entered on the 'Other Income' tab on the Finances page.

They are taxed as regular income, so you may have to modify the value to reflect their different tax status if they are non-eligible dividends.

By: RetireWare / Equisoft On 10:40 AM

Continue Reading

Receiving Tax-free Cash Flows

Question:

I'd like to know if there is a way to account for tax-free cash flows? (for example, an individual has agreed to lend a mortgage to someone. The capital payments that this individual recieves should be tax-free.)

Answer:

You can enter up to four different years' worth in 'Other Assets'. If payments are monthly, multiply by twelve, then select a ca;endar year for each for 'Year Anticipated'. Also, be sure to select 'Other future assets' in 'Sources of Income'.

If there are more than four years of payments, then enter them as 'Additional Income' in 'Sources of Income'.

These amounts are taxed as income, so you could gross them up by a percentage such that the after-tax amount is roughly equivalent to the non-taxable payments.

By: RetireWare / Equisoft On 10:28 AM

Continue Reading