1 massive change for 2021!
Towards the end of 2020, the Canada Revenue Agency (CRA) trumpets were sounding to remind users of the Canada Pension Plan (CPP) of a massive change in 2021. As of January 1, 2021, the contribution limit to CPP will increase again. This is the third such increase since the start of the pension enhancements in 2019.
Due to the mandatory increase, the maximum annual pensionable earnings (YMPE) for 2021 is now $ 61,600. In 2019 and 2020, the YMPE was $ 57,400 and $ 58,700. The increase in the YMPE is the effect of the gradual increase in contribution rates under the “enhanced CPP”.
Higher contribution rates for five years
The rationale for increasing CPP contributions is to guarantee Canadians a higher retirement income in the future. Under the enhanced CPP, the overall increase in the contribution rate from 2019 to 2023 is 1%. However, CPP users will contribute more each year.
With the employee and employer contribution rate of 5.45%, the annual pay reduction per user is $ 3,166.45. The employer will match the contribution of an employee. A self-employed person will contribute $ 6,332.90 this year, or $ 536.90 more than in 2020. In the meantime, the CRA will keep the Basic Year Exemption (EBA) constant at $ 3,500.
Note that the CRA adjusts the maximum pensionable earnings limit each year. If your income exceeds the YMPE, the tax agency will not ask or allow you to make additional contributions. In addition, the changes to the CPP ensure that benefits match the cost of living.
Higher payout in 2021
The amount of CPP payments usually depends on your contributions and how long you have made them. Most retirees do not receive the maximum benefit. For 2021, the maximum monthly benefit at age 65 is $ 1,203.75. However, the monthly average was only $ 689.17 for new beneficiaries as of October 2020.
The annual pension for a person aged 65 and whose payment begins today is $ 8,270.04. Despite the increasing annual amounts, the CPP will leave most retirees with a significant income gap. You can choose to take your CPP to 70 to get a permanent 42% increase.
Elite Dividend Payer
Planning for retirement requires a well-designed strategy. Your CPP (plus Old Age Security) is an integral part and will not represent more than 50% of pre-retirement income. If you want to maintain your priorities and lifestyle choices throughout retirement, you need more than the CPP pension.
Save and invest in established dividend payers to ensure your financial health. An elite income stock is Toronto-Dominion Bank (TSX: TD) (NYSE: TD). The second largest bank in Canada pays a dividend of 4.19% and boasts a 164-year dividend history. A position of $ 197,500 will produce $ 689.60 in monthly passive income.
If you hold TD shares for 20 years and continue to reinvest dividends, the principal will compound to $ 448,836.18. This $ 136.93 billion is among the 10 largest banks in the United States. Almost 70% of the bank’s operations also take place in the wealthiest states. Over the past 10 years, TD has achieved a 13% CAGR, making it a dream investment.
Avoid financial disruption
Financial problems await Canadians who are optimistic that the CPP will pay for all financial needs in retirement. Save money, let it grow, and build your nest egg while you have the time. It could cause problems if you don’t take action and leave everything to chance.
Post’s Canada Pension Plan: 1 massive change for 2021! first appeared on The Motley Fool Canada.
Silly contributor Christopher Liew has no position in any of the listed securities.
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