A recent survey found that retirement and affording the day-to-day expenses of having a family are the top two financial concerns of working Canadians. Can you relate? With rising interest and inflation rates, retirement might seem impossible.
Understanding the specifics of the Canada Pension Plan is important, regardless of if you plan on retiring tomorrow or in three decades. This article will cover the basics of this government program, including eligible individuals, recent developments, and how you can maximize your benefits in retirement.
What is the Canada Pension Plan?
The Canada Pension Plan, known as CPP, is a monthly retirement pension that replaces part of your income when you retire. Those that qualify have the ability to receive monthly income for the rest of their lives. To qualify, you must be at least 60 years old and have made a minimum of one valid contribution to the CPP.
Monthly CPP payments are made based on your average working life earnings, your CPP contributions, and the age at which you begin taking benefits. Unfortunately, CPP contributions are mandatory, with your employer required to match your contributions. Self-employed individuals must pay both the employee and employer rates.
Recent Developments in CPP
Beginning in 2024, taxpayers are now able to contribute more dollars to the CPP following annual inflation adjustments. The new maximum pensionable earnings will increase to $68,500, up from $66,600 in 2023. However, employee and employer rates will remain at 5.95%, while self-employed rates hold steady at 11.9%.
Another change for the 2024 tax year is found in an additional maximum pensionable earnings contribution. This rate is at 4% for both employers and employees on earnings between $68,500 and $73,200. This rate is increased to 8% for self-employed taxpayers. Besides the annual inflation adjustment, the CRA is trying to help individuals save for retirement with the increased wage base and additional contribution threshold.
Maximizing Your Benefits
CPP contributions are required for all working individuals between the ages of 18 and 69. The CRA recommends that taxpayers start taking CPP benefits at age 65, but you can begin receiving monthly benefits as early as 60 or as late as 70. Be sure you factor in processing time for your CPP benefits, as it can take a few weeks to process your request.
Moreover, if you are still working and contributing to the CPP, it’s important that you are aware of a few different situations. For one, each employer is required to withhold the maximum CPP contributions. If you switched jobs during the year, you can claim any excess contributions on your income tax and benefits return. Additionally, only self-employed individuals who earn more than $3,500 are required to contribute to the CPP.
Are you receiving CPP benefits for the first time this filing season? If so, it’s important to contact a qualified tax accountant to minimize your liability, as CPP income is taxable. Switching jobs during the year and opening your own business are two more instances where it’s beneficial to discuss your tax situation with a qualified accountant.
Our team at NRK Accounting is here to help you navigate CPP contributions and benefits. Reach out today to schedule your free consultation.