Lower income, higher tax credits... Keep your retirement goals in mind when planning a parental leave.
Having a baby is a time in your life when you can expect a lot of change. In addition to learning about parenting on a day-to-day basis, you have to anticipate the expenses you will incur with a newborn baby, while adjusting to earning a lower salary.
For example, the weekly benefits paid under the Québec Parental Insurance Plan (QPIP) from January 1st to August 31st, 2016 were on average $518.49 for maternity benefits, $634.04 for paternity benefits and $493.14 for parental benefits.
To calculate the benefits to which you may be entitled, use the benefits calculator on the QPIP website.
Depending on the parental insurance plan you choose, expect to live without 25% to 30% of your salary.
It may become more difficult to contribute to your Registered Retirement Savings Plan (RRSP) up to the maximum amount allowed, that is, 18% of your income up to the annual limit for that year. Some people forget about their RRSP contributions when budgeting for a parental leave and decide to postpone their contributions until they are back at work.
If you’re not contributing to your RRSP at all during your parental leave, thelost amount may end up representing thousands of dollars, in addition to affecting your retirement income, or even result in you having to postpone your retirement.
The best strategy is to reduce your contributions rather than suspend them altogether. If you don’t think that a lower income will allow you to do so, you should put that amount aside before the leave begins.
Those who have a group retirement savings plan sponsored by their employer can find out about the conditions of the plan during their absence. Some companies allow their employees to continue paying into their plan, but they are required to pay the employer's share as well. Paying twice the amount could be very difficult when you already are on a tight budget.
On the other hand, if you decide to maintain your RRSP contributions while on leave, it may be worthwhile to wait until you are paid your full salary again to benefit from greater tax savings.
For example, if a mother normally earns $80,000 and her salary falls to $56,000 with the QPIP during her maternity leave, she can contribute to her RRSP anyway during that period, but claim a deduction for those RRSPs. The next year, or when she regains her full salary, it will be more helpful to use them to reduce her taxable income.
Once QPIP benefits end, some people choose to extend their parental leave by an additional year. RRSPs are often the funds that are used to make up for the lack of income.
The withdrawal must, however, be made during the tax year when your income was lower in order to prevent the funds from being deducted from the withholding taxes, which are calculated on the basis of the total annual income. The amounts received from the QPIP during this time will therefore be taken into account.
Of course, this kind of strategy has the disadvantage of reducing capital at retirement. You should also keep in mind that theamounts withdrawn would not be added to future contribution room, meaning they will be lost forever.
For these reasons, it is better to talk to a financial advisor to ensure that this is the best choice for your particular situation.
Some tax credits and the federal child allowance could help mitigate the decrease in income you could experience during parental leave. For example, for a family with one child and a family income of $85,000, the allowance they receive is $276 per month, or $3,310 per year – which is tax-exempt. In Quebec, there is also the Child Assistance Payment, which is administered by Retirement Québec.
You may also be eligible for other tax credits. As everyone’s situation is unique, it is better to talk to an accountant to make sure you take advantage of all possible deductions.
Lastly, don’t forget that the benefits received from the Québec Parental Insurance Plan (QPIP) are taxable, but that the withholding tax on these amounts does not take into account other income received during the year.
This affects many people negatively because the next year they have to unexpectedly repay thousands of dollars. Since the deductions at source may be insufficient, it’s better to err on the side of caution and to ask for a bigger deduction from your employer or put money on the side before taking your parental leave.
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