1 big CPP pension change you should know
The Canada Pension Plan (CPP) is a big reason Canada is such an amazing place to live as a retired citizen. After all the hard work you put in while you worked, you can rest assured that the government will take care of you to cultivate the relationship.
The CPP is not a government funded retirement fund like Old Age Security (OAS). People fund their CPP pensions throughout their working lives. If you are over 18, do not live in Quebec and earn more than $ 3,500 per year, you are required by law to contribute to the CPP.
The CPP comes into effect at age 65. However, you can start collecting it when you turn 60 or postpone it until 70. Deferring CPP is ideal because it results in a higher monthly pension once you start collecting CPP.
The Canada Revenue Agency (CRA) has announced an update to the CPP that you should know about to better budget your monthly income.
Major change to the CPP for 2021
The government agency has announced that the maximum annual pensionable earnings (YMPE) for 2021 will be different from last year. The YMPE is the threshold of your earnings that the CRA takes into account when calculating how much you can contribute to your CPP. The old MGAP in 2020 was set at $ 58,700. With the 2021 update, you can contribute up to $ 61,600, which is $ 2,900 more than the 2020 cap.
Contribution rates for employers and employees have increased from 5.25% to 5.45% as of this year. Since the self-employed do not receive matching contributions, they must contribute 10.9% to their CPP.
Creation of a secondary retirement fund
The Registered Retirement Savings Plan (RRSP) is a secondary retirement fund to which all Canadians should contribute, but it is not mandatory.
Contributions to an RRSP are tax deductible. This means that you can deduct your RRSP contributions in an income year to reduce taxable income for that year, allowing you to pay taxes on a lower aggregate amount.
The more money you can set aside now, the better your financial situation will be in retirement. A great way to get the most out of your RRSP as a secondary retirement fund is to use the account to store reliable, high-quality income-generating assets that can appreciate over time and grow your wealth without pay tax.
Fortis (TSX: FTS) (NYSE: FTS) could be a great asset to consider for this purpose. The Canadian Dividend Aristocrat has increased its dividends for nearly 50 consecutive years, making it a reliable dividend-growing stock for any portfolio. The company plans to increase its dividends by 6% per year over the next five years.
It has low risk, regulated and diversified assets that generate predictable and reliable cash flows. Fortis can use its predictable earnings to fund capital growth programs and comfortably increase shareholder dividends. The company plans to increase its rate base by approximately $ 10 billion over the next five years.
Fortis could use its higher rate base to support earnings and increase dividend payments to shareholders. The stock is trading at $ 54.46 per share at the time of writing, and it boasts a hefty dividend yield of 3.71%. This could be an ideal investment to consider if you are building a secondary retirement portfolio through your RRSP.
The article CRA Update: 1 Major Change to the CPP Pension Plan You Should Know First appeared on The Motley Fool Canada.
Foolish contributor Adam othman has no position in any of the stocks mentioned. The Motley Fool recommends FORTIS INC.
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