We all know how challenging it can be to stay on top of ever-changing facts and figures in the field of personal finance. With that in mind, we have compiled a short list of key items to keep in mind for 2020.
2020 TFSA Limit
The 2020 TFSA limit remains at $6,000, unchanged from the 2019 limit. Keep in mind that, unlike RRSP contributions, TFSA contributions are not tax-deductible. However, like your RRSP contribution limit, your TFSA contribution limit is also cumulative, and any amounts not used in the current year are carried forward to the next year. Since its inception in 2009, the annual TFSA limit has fluctuated between $5,000 and $10,000. As of 2020, that cumulative total is $69,500. That is, for someone who has been eligible for a TFSA (age 18+) since 2009, but has never contributed, a total of $69,500 can be contributed in 2020. A significant difference between TFSAs and RRSPs is that amounts withdrawn from your TFSA can be re-contributed in subsequent years.
2020 RRSP Limit
For 2020, the maximum RRSP contribution limit is $27,230. This represents a $730 increase from the 2019 limit of $26,500. However, unlike the TFSA, the RRSP contribution limit is not egalitarian – you only “earn” that much contribution room if your income supports it. Recall that the RRSP contribution limit is 18% of your earned income as defined by the Income Tax Act. Therefore, your previous years’ income (2019) would have to be at least $151,278 in order to generate the maximum contribution limit of $27,230 in 2020. Also, recall that your RRSP contribution limit is cumulative just like your TFSA contribution limit, and any unused contribution amounts are carried forward.
CPP Contribution Rate and YMPE
The CPP contribution rates, for both employer and employee, will increase from 5.1% in 2019, to 5.25% in 2020. Recall that those who are self-employed must pay both the employer and employee contributions to CPP, for a total of 10.5%. Of course, CPP contributions are only levied on income between the YBE (Year’s Basic Exemption) and the YMPE (Yearly Maximum Pensionable Earnings). While the YBE remains unchanged at $3,500, the YMPE has increased from $57,400 in 2019, to $58,700 in 2020. So, unless you’re self-employed, the maximum you can contribute to CPP in 2020 is $2,898. For those who are self-employed, and therefore contributing the employee and employer portion, that amount is doubled to $5,796.
EI Contribution Rate and MIE
Although the Maximum Insurable Earnings (MIE) has increased in 2020, the employer and employee contribution rates have decreased slightly. For 2020, the Maximum Insurable Earnings (MIE) has increased to $54,200, which is an increase of $1,100 from the previous MIE of $53,100 in 2019. However, the employee contribution rate has decreased from 1.62% in 2019, to 1.58% in 2020. Likewise, the employer contribution rate has decreased from 2.268% in 2019, to 2.212% in 2020. And unlike CPP contributions, there is no basic exemption amount from EI contributions – every dollar of income up to the MIE is subject to EI contribution. The employee contribution of $856.36 and employer contribution of $1,198.90 are the maximums are reached for anyone earning an income of $54,200 (2020) or more.
Those items are all especially important if you’re still working. But what if you’re getting ready to retire, or already retired?
First and foremost, Canada Pension Plan (CPP) retirement benefits are not automatic – you must apply before you can start receiving your CPP pension. Although the “normal” start date is age 65, you can begin receiving income from CPP or the corresponding Quebec Pension Plan (QPP) as early as age 60, or as late as age 70. However, the amount you receive varies greatly from one person to the next. Your CPP benefit is determined entirely as a function of how much you’ve contributed during your working years. According to the Government of Canada’s most recent figures, as of July 2019, the average monthly CPP/QPP benefit at age 65 was $683.65 per month. Remember that CPP retirement benefits are taxable.
OAS Benefits and Clawback
Unlike CPP, the OAS benefit has nothing to do with working, and is based solely on the number of years you have lived in Canada. That is, while CPP is a contributory program, OAS is a non-contributory program. OAS typically starts at age 65, but can be postponed until age 70. According to the Government of Canada’s most recent figures, as of December 2019, the maximum monthly OAS benefit at age 65 was $683.65 per month. Also unlike CPP, your OAS benefits will be “clawed back” if your income reaches a certain point. That threshold was $77,580 in 2019, and has been increased to $79,054 for 2020. Note that the OAS clawback is a gradual reduction in benefits, and eligible seniors can still receive a partial pension with incomes exceeding $125,000. Like CPP, OAS retirement benefits are also taxable.
How do the facts and figures presented here fit into your financial plan? How much should you contribute to your RRSP or TFSA, or when should you start receiving CPP or OAS? If you want to speak with a professional advisor, or if you have any other questions about any of our services at ModernAdvisor, just contact us.