To save on estate tax, Linda wants to know if she should withdraw more than the annual minimum from her RRIF now even if it means more of her Old Age Security benefit will be clawed back.Laura Proctor/The Globe and Mail
Linda is 81 years old, a recent widow who is well-fixed financially. She has a mortgage-free house in the Greater Toronto Area, two children and four grandchildren. “I have plenty of income to last me until I die,” Linda writes in an e-mail, but she would like to keep the taxes she pays on her estate to a minimum.
In addition to her government benefits of $24,100 a year, Linda has a defined benefit pension that pays $22,520 a year, not indexed to inflation. She draws the minimum from her registered retirement income fund (RRIF) each year, bringing her total income before tax to about $98,000 a year. At that level, a portion of her OAS would be clawed back.
“I want to minimize the income tax that will be deducted from my RRIF, allowing me to leave as much as possible to my heirs,” Linda writes.
Linda lives modestly, spending about $50,000 a year.
Her question: To save on estate tax, should she withdraw more than the annual minimum from her RRIF now even if it means more of her Old Age Security benefit will be clawed back?
In this Financial Facelift, Warren MacKenzie, an independent financial planner in Toronto, looks at Linda’s situation. Mr. MacKenzie holds the chartered professional accountant designation.
Millennials pay higher taxes for boomers’ retirement – and the burden is only going to increase
The income taxes paid by Canadian millennials are being squeezed by population aging, writes Paul Kershaw in this personal finance article. The typical 35-year-old now pays approximately 20-per-cent to 40-per-cent more for boomers’ healthy retirements than boomers paid as young people to support the smaller number of seniors in their day.
This extra tax burden will only get heavier in the years ahead as Ottawa enacts planned increases for Old Age Security (OAS) and the Canada Health Transfer, and provinces increase medical spending for their aging populations.
It is time to admit that Canada’s plans for population aging run afoul of the “intergenerational golden rule.” As Statistic Canada’s former assistant chief statistician, Michael Wolfson, famously wrote: “One generation, when it becomes old and frail, should not expect to be treated any better by its children than it treated its parents’ generation in their old age.”
Unfortunately, this is exactly what is now expected of Gen X, millennials and Gen Z – because governments decades ago didn’t plan adequately for boomers’ retirement.
We can estimate how much bigger young people’s tax burden is by examining federal and provincial income taxes owed by 35-year-olds in 2022 (the most recent data) compared with 1976. I use Statistics Canada’s Social Policy Simulation Database to calculate taxes paid by individuals with identical incomes in both eras, after adjusting for inflation. (Full results are available on the Generation Squeeze website.)
Read the full article here.
Dr. Paul Kershaw is a policy professor at the University of British Columbia and the founder of Generation Squeeze, Canada’s leading voice for generational fairness. He offers policy advice to governments of all party stripes, including the current federal cabinet.
Why is there still a life expectancy gap of more than four years between men and women today?
In this Charting Retirement, Frederick Vettese, former chief actuary of Morneau Shepell and author of the PERC retirement calculator (perc-pro.ca), looks at the life expectancy gap between men and women in Canada.
In case you missed it
Three underutilized and tax-effective ways for wealthy clients to donate
Most clients pick a loved one or their estate as the beneficiary for their investments, writes Globe Advisor reporter Deanne Gage but, she adds, fewer consider a registered charity.
Designating a charity as a beneficiary can be tax-efficient, especially for wealthy clients who don’t need the money and feel their heirs already have sufficient assets, says Alexandra Spinner, chartered professional accountant and partner in the tax and estate planning group at Crowe Soberman LLP in Toronto.
Read more about these underutilized and tax-effective charitable giving strategies – registered accounts, life insurance policies and donor-advised funds – here.
Why modelling decumulation products for clients is so challenging
The market for decumulation products in Canada has picked up in recent years, writes Jason Pereira, a senior partner and financial planner at Woodgate Financial in Toronto. But while advisors don’t lack options – with products such as tontines, guaranteed minimum withdrawal benefits (GMWBs) and advanced life deferred annuities (ALDAs) available – we lack frameworks for decision-making and product allocation to optimize client outcomes.
The inability to enter the variables of assets, age, gender, market return and volatility, risk tolerance, desired income and other factors into financial planning software and receive an answer that gives clients their best possible combination of products is a major hindrance.
To date, the available products’ novelty, the lack of solid allocation frameworks, the behavioural factors and compensation differentials – combined with a general lack of appreciation of the challenges and mathematics of decumulation – have contributed to low adoption.
Given these limitations, how can an advisor utilize what’s available to help their clients?
Read the full article here.
This is the fourth and final article in a series examining the decumulation product landscape in Canada and how advisors can explain the options to clients. Read Part 1 here, Part 2 here and Part 3 here.
Retirement Q & A
Last week’s newsletter featured a Q & A regarding snowbirds and the definition of stability and travel insurance, which prompted more snowbird curiosity. This week, we’re looking at whether it’s worth it to travel back and forth to Canada to “reset” your travel medical insurance.
Q: My husband and I are snowbirds and a friend recently told us that we can save money on travel insurance by flying back to Canada for a short period of time (i.e. a day or even a couple of hours) to “reset” our travel insurance coverage and then flying back to our winter destination. Is this true?
We asked Stephen Fine, president, Snowbird Advisor, to answer this one.
A: Your friend is likely referring to snowbirds who have multitrip annual travel medical insurance coverage and travel back and forth to Canada for short periods over the winter for the sole purpose of “resetting” their coverage.
While this may make sense for some, it rarely makes sense when you look at the cost, inconvenience and possible risks of travelling back and forth compared with simply purchasing top-up coverage and staying in your winter destination.
What’s the logic behind travelling back and forth? Multitrip plans provide emergency medical coverage for an unlimited number of trips over a 12-month period. However, annual plans also limit the number of days you are allowed to travel per trip – for example, 30 days, 60 days, 90 days, etc. Once you reach your limit, you must return to your home province before travelling again to “reset” the clock on your coverage (unless you purchase “top-up” coverage – see below).
As a result, some snowbirds with multitrip travel insurance plans fly back to Canada for very brief periods for the exclusive purpose of resetting their per-trip coverage period. By doing this, they believe they are saving money by not having to buy additional travel insurance coverage, and in some cases they are. However, in many cases, they would actually be better off simply staying in their winter destination and purchasing what is known as “top-up” coverage for their existing multitrip plan, as outlined below.
Top-up coverage allows you to add extra days of coverage to a trip under your multitrip plan if that trip is going to be longer than the maximum per-trip limit allowed by your multitrip plan. For example, let’s say you have a multitrip plan that allows you to travel for 30 days per trip, but you want to be away for 59 days on a particular trip. In this situation, you would purchase a 29-day top-up plan for that trip to cover you for the period beyond your policy’s 30-day per-trip limit (It’s important to note that if you already have a “cause for claim” under your original travel insurance policy, you likely won’t be eligible to purchase top-up coverage).
Some travellers are under the impression that top-up coverage is much more expensive than the cost of round-trip airline tickets (and other related travel expenses), however, in many cases top-up coverage can be less expensive, equally expensive, or only slightly more expensive. Plus, you’ll have the added benefit of not dealing with the hassle and inconvenience of flying back and forth.
While it usually isn’t worthwhile to travel back and forth to reset your travel insurance, there may be some scenarios where it makes sense financially.
Watch out for changes to your health or medical conditions. If you are thinking about returning to Canada to reset the clock on your multitrip plan, an important risk you need to be aware of is that changes to your health and medical conditions may negatively affect your coverage.
Travel medical insurance policies cover you based on your health and medical conditions at the time you leave your home province or territory. If you return to Canada and there have been any changes in your health or medical conditions – either while you are away or while you are back in Canada, no matter how briefly – you would need to contact your travel insurance provider to inform them of the changes, which could negatively affect your insurance coverage in a number of ways, including premium increases, exclusion of certain conditions from coverage and, in some cases, being declared ineligible for coverage.
You can learn more about flying back and forth to Canada to reset your travel insurance coverage here.
Have a question about money or lifestyle topics for seniors? E-mail us at sixtyfive@globeandmail.com and we will find experts and answer your questions in future newsletters. Interested in more stories about retirement? Sixty Five aims to inspire Canadians to live their best lives, confidently and securely. Sign up for our weekly Retirement newsletter.
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