PER: Should you take advantage of the tax benefit when you invest or when you withdraw?
The tax exemption offered by the Retirement Savings Plan (PER) can be advantageous if your marginal tax rate is 30% or higher. However, if your marginal tax rate is 11%, it makes more sense to take advantage of the tax benefits when you withdraw funds from the plan.
The PER is a savings vehicle designed specifically for retirement. Introduced in 2019 as part of the Pacte Act, the PER replaces older plans such as the PERP, Préfon, PERCO, and Madelin plans. It stands out for its simplicity, transparency, and flexibility. It is a long-term savings product dedicated to retirement. During your working life, you can contribute money to it, which remains locked in until you retire, except in a few specific cases where early withdrawals are permitted, such as the purchase of a primary residence.
Your PER is administered by your insurance company or bank, and you can make contributions to it at your convenience. These funds are then invested in the financial markets, either through euro-denominated funds or unit-linked funds. You can choose to manage your account yourself or opt for managed investing by your advisor, which is tailored to your risk profile and your personal and professional circumstances.
What are the tax benefits of opening a PER account?
Contributions made to your PER may be deducted from your income tax. Thus, the more you save in your PER, the more you save on taxes. This tax feature of the PER is particularly advantageous for taxpayers with a high marginal tax rate. In fact, the higher your marginal tax rate (TMI), the more substantial the tax deduction you’ll receive. It is therefore strongly recommended that you invest in a PER if your TMI exceeds 30%.
You can choose the option that is most advantageous for you: either 10% of your income from the previous year, up to eight times the Annual Social Security Ceiling (PASS) for the previous year, or 10% of the PASS for the previous year. Tax deductions for voluntary contributions to a PER must comply with certain limits.
Why is the PER tax treatment advantageous if you're in a high tax bracket?
Retirement is when you withdraw your savings. The amounts withdrawn are subject to income tax, but at this stage, your income is generally lower than it was during your working years. As a result, your marginal tax rate decreases, which enhances the tax advantage of the retirement savings plan, since withdrawals are taxed at a lower rate. Income, such as interest and capital gains, is taxed at a rate of 30%.
If your marginal tax rate (TMI) is 30% during your working life, you are not taxed on contributions to your PER or on any earnings from it. When you retire and your TMI drops to 11%, you withdraw the money from your PER and are taxed at a lower rate than during your working years (30% vs. 11%).
You also have the option to defer your tax benefit when your marginal tax rate is less than 30%.
If you pay little or no income tax, the tax benefit of the PER is less advantageous for you. However, you can choose to take advantage of this benefit in a different way. You have the option of forfeiting the tax deductibility of your contributions in exchange for lower taxes upon withdrawal.
The amounts withdrawn when you liquidate your savings are taxed as a life annuity paid for consideration. The tax rate depends on your age at the time of the first payment:
• 70% for a beneficiary under 50 years of age.
• 50% for a beneficiary between 50 and 59 years of age.
• 40% for a beneficiary aged 60 to 69.
• 30% for a beneficiary over 69 years of age.
In addition, the CSG and CRDS are due at a rate of 17.2%.
