The 2021 CPP pension change you need to know
The Canada Revenue Agency (CRA) always announces significant changes at the end of the year. Towards the end of 2020, the government agency began reminding users of the Canada Pension Plan (CPP) that it will be making major changes to the pension plan in 2021.
The change took effect on January 1, 2021 and resulted in a contribution limit for the plan. The recent update is the third such change since the CRA began enhancing the CPP in 2019.
The update is a mandatory increase in contribution rates. This means that the maximum annual pensionable earnings (YMPE) for 2021 has increased to $ 61,600. In 2019, the amount was $ 57,400, and it increased to $ 58,700 last year. The increase in the YMPE is the result of the gradual increase in the CPP contribution rates in the enhanced CPP.
Let’s take a closer look at the CPP pension updates you need to know.
Higher contribution rates for five years
The CRA is changing CPP contributions to ensure that Canadians have access to more substantial retirement income in the future. The Enhanced CPP has an overall contribution rate increase of 1% from 2019 to 2023. However, CPP users will contribute more each year.
The contribution rate for employees and employers is 5.45% after the update. Self-employed workers will have to contribute twice as much, as they cover both employee and employer contributions. The CRA maintains the same annual basic exemption (EBE) amount at $ 3,500 for 2021.
The CRA also adjusts the maximum pensionable earnings limit each year. If your income exceeds the YMPE, the agency will not require or even allow you to make additional contributions. These changes to the CPP are designed to ensure that benefits can keep pace with the rising cost of living.
Biggest payout in 2021
The amount of CPP you receive depends on how long and how much you contribute to the plan. Most retirees do not receive the maximum benefits. The maximum benefits that Canadian CPP users can receive at age 65 is $ 1,203.75. However, the average monthly payment for new beneficiaries as of October 2020 is $ 689.17.
The annual pension for a person aged 65 and whose payment begins today is $ 8,270.04. The CPP will still leave most Canadian retirees with a substantial income gap, despite the increase. It would be better to defer your CPP until age 70 if you can for a higher payment.
A stock of dividends for more retirement income
There are other ways to increase your retirement income to live a more comfortable retirement life, besides deferring your CPP for a larger payment. Between Old Age Security (OAS) and CPP, you can get a good chunk of your retirement income. However, adding another source of income may be necessary to meet your lifestyle needs.
A Tax-Free Savings Account (TFSA) with a portfolio of reliable dividend-paying stocks like Toronto-Dominion Bank (TSX: TD) (NYSE: TD) may be ideal for this purpose. Saving and investing in established dividend distribution companies like TD can help ensure your financial well-being in retirement.
TD is the second largest bank in Canada, and it has a massive 164-year dividend streak. The company has never failed to pay its shareholders their dividends for such a long time, making it a reliable income generating asset for your TFSA dividend income portfolio.
The stock is trading at $ 73.85 per share at the time of writing, and it pays its shareholders a hefty dividend yield of 4.28%. Saving and investing in stocks can help you start building a very profitable TFSA portfolio.
Using your dividend income to reinvest in reliable, long-term dividend-paying stocks can help you create a massive secondary pension. When you retire, you can start using the payouts to top up your higher CPP contributions. TD can be a great stock to start building such a TFSA portfolio.
The post CRA Update: The 2021 CPP Pension Change You Need to Know first appeared on The Motley Fool Canada.
Foolish contributor Adam othman has no position in any of the stocks mentioned.
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