The simple answer is you don’t have a choice
If you’re under age 65 and earning an income, you must contribute to CPP.
Q: I am 60 years old and have paid into the Canada Pension Plan (CPP) for the past 38 years, most of them at the maximum. I am now self-employed and working part time, making about $130,000 annually. Is there any advantage to me continuing to pay into the CPP for the next five years until I start drawing CPP? — Fareet in Toronto
FP Answers: Fareet, the simple answer is you don’t have a choice. If you’re under age 65 and earning an income, you must contribute to CPP. It’s only after age 65 that you can opt out of making CPP contributions. The problem is that you have almost contributed enough to qualify for the maximum CPP benefit, so any additional contributions won’t increase your base CPP pension. It is money wasted.
Even worse, you’re self-employed. You must make both the employee and employer’s contributions, for a total of $6,999.60 per year. You’ll be paying twice what an employed person will be paying. Plus, your CPP contributions will increase each year with the increase in the yearly maximum pension earnings (YMPE), and annual CPP contributions.
Now, to be fair, you will likely get a little increase in your CPP pension due to the CPP enhancements — that is, a larger pension — but not enough relative to what you’ll be contributing.
You also have the option of using your CPP contributions to fund the Post-Retirement Benefit (PRB) program. The program allows Canadians who are older than 60, receiving CPP but still working and contributing to CPP, to receive additional benefits for their contributions. The PRB is a smaller pension benefit equal to 1/40th of the CPP and it can’t be split with a spouse for tax purposes. Like the CPP, if you collect it before age 65, it is reduced by 0.6 per cent per month, and after age 65, it is increased by 0.7 per cent per month.
You qualify for the PRB when you are over age 60 and collecting your CPP pension. It will be added to your monthly CPP benefit, even if you are already receiving the maximum CPP retirement amount, and that will continue for the rest of your life. Each additional year that you continue working and contributing after you start collecting CPP will earn you a new PRB that will be added to your monthly CPP benefit the following year.
The benefit is paid in the year following your CPP contribution. Did you catch that? You can’t start collecting the PRB until you’re collecting your CPP.
This all sounds good, but there’s a catch.
Please read the next part of the article in our next post.
Author of the article: Julie Cazzin Published Jan 13, 2023
By Julie Cazzin with Allan Norman
Martin Pelletier: Investment risks in 2023
*The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions, a further review should be done by a qualified professional. No individual or organization involved in either the preparation or distribution of this text accepts any contractual, tortious, or any other form of liability for its contents.
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