Be prepared for a monthly pay cut of $ 500 in 2021
Service Canada will make changes to the Canada Pension Plan (CPP) in 2021. These changes could mean a pay cut of $ 500 each month. The CPP is a mandatory retirement plan, where your employer deducts your contribution as well as their contribution. What you get is the net income after these deductions.
As part of the CPP enhancement scheme, Service Canada has increased the CPP contribution rate to 5.45% and the maximum pensionable earnings to $ 61,600 for 2021. How will this affect your salary in 2021?
How will the CPP impact your salary?
If your gross annual income is $ 61,600, your monthly salary is just over $ 5,100. Your employer will deduct both employer and employee CPP contributions of 5.45% each. That’s $ 528 per month in total CPP contribution. In 2021, your salary will be $ 4,606 per month.
Service Canada has increased the total annual employer and employee contribution to the CPP from $ 537 to $ 6,333 in 2021 ($ 5,796 in 2020). This modest increase in contribution will go a long way. While this will reduce your current salary, it will give you a federal tax credit of approximately $ 409.86.
You will get the CPP benefit when you turn 65. After age 65, Service Canada will pay you a monthly pension equal to one-third of your average work income you received after 2019.
How can you make up the $ 500 gap in your paycheck?
The many benefits of CPP outweigh the $ 500 per month pay cut. But the pay cut stings. You can close the monthly gap of $ 500, or the annual gap of $ 6,000, by claiming the various tax benefits offered by the Canada Revenue Agency (CRA). It increased the tax credit from the basic personal amount of $ 174 in 2021 and launched a Canada training credit of $ 250. In addition, Service Canada has increased the registered retirement savings plan (RRSP) contribution limit by $ 600. You can deduct this additional contribution from your 2021 taxable income.
The CPP enhancement will increase your contribution each year until 2025. This means that you could see a larger pay cut each year. An effective way to deal with this drop in salary is to close the gap with passive income. A Tax-Free Savings Account (TFSA) is a tax-efficient way to earn passive income. The CRA allows the money you contribute to the TFSA to grow tax-free, and you can withdraw that money without worrying about taxes.
Investors generally look for fixed income securities to earn passive income. But the pandemic crisis has brought interest rates down to near zero, making fixed income unattractive. However, the pandemic has created good dividend opportunities.
Dividend stocks are the new source of income
Invest $ 6,000 of your TFSA contribution in RioCan REIT (TSX: REI.UN). The pandemic raised its dividend yield to 7.95%. This return gradually decreases, as the stock price recovers from the March sell-off when the return hit 10%.
RioCan develops stores in prime locations and pays dividends on rental income it obtains from retailers. When the pandemic-triggered lockdown closed all non-essential stores, RioCan suffered from reduced rent collection, lower occupancy and risk of default.
But the recovery was quick and its rent collection normalized. The occupancy rate will take some time to return to pre-pandemic levels, but this will not affect the REIT’s dividend-paying ability. An investment of $ 6,000 in RioCan will earn you an annual dividend of $ 480 for life.
RioCan is on the road to recovery. The stock has already jumped 23% so far this month. Those who invested in the stock before the start of November have already earned $ 1,200 in capital appreciation. The stock will return to the pre-pandemic level of $ 27 in two years. This means another $ 3,000 in capital appreciation plus $ 950 in dividend income. This will close more than 50% of the gap in the CPP pay cut.
The Canada Post Pension Plan: Prepare for a $ 500 Monthly Pay Cut in 2021 was first published in The Motley Fool Canada.
Silly contributor Puja Tayal has no position in any of the listed securities.
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