10 Retirement Income Tax Strategies That You Need to Know

The shift from accumulating wealth for retirement to dipping into your retirement income can be confusing. For many, there may be tax implications. Here are 10 retirement income tax strategies that can maximize your income in retirement.

1 | When’s the best time to start collecting CPP/QPP and OAS?

Deciding when you start receiving benefits can have lasting consequences for your retirement income. Before taking your benefits early or choosing to defer, you need to consider: your life expectancy, cashflow needs, the impact on income-sensitive benefits, whether you will spend or invest the benefit, if you’re receiving CPP disability benefits, as well as changes to current and future tax rates.

2 | Should I share CPP/QPP benefits with my spouse or partner?

If you and your spouse/common law partner (CLP) are at least age 60, living together and have contributed to CPP during your time together, sharing your CPP or QPP benefits may provide significant tax savings. You simply transfer your benefit to the spouse/partner in a lower tax bracket.

3 | How splitting pension income can reduce your taxes

If you reside in Canada and live with a spouse/CLP at the end of the year, you can allocate a maximum of 50% of your pension income to that spouse/CLP. This strategy works best when the pension income recipient is in a higher tax bracket.

4 | How can contributing to a spousal RRSP reduce your tax

A spousal RRSP is an RRSP where the high-income spouse makes contributions on behalf of the low-income spouse/CLP. The goal with spousal RRSPs is to equalize income in retirement for each spouse, lowering your tax burden.

5 | Strategies to reduce taxation when converting an RRSP to a RRIF

After age 71, you can no longer own an RRSP. Unfortunately, simply withdrawing money from an RRSP can lead to high taxation. Several strategies can lower these tax obligations and increase your cash flow. For example, you can use the younger spouse’s age, invest the RRIF minimum, split pensions with RRIFs, designate beneficiaries, make one final RRSP contribution before conversion, and more.

6 | Getting the most out of your TFSAs in retirement

While a TFSA is not traditionally viewed as a retirement savings vehicle, it can serve as an integral part of your retirement income plan. Unlike a RRIF, you may continue to make contributions to your TFSA after age 72. The funds in it can continue earning tax-free growth and income. High income retirees can also tap into TFSAs to create additional tax efficient cash flow in retirement.

7 | Can A spousal loan lead to considerable tax savings

A spousal loan is another powerful income-splitting strategy for couples in retirement. The goal is to shift investment income that would be taxed from the high-rate spouse to the low-rate spouse. This is typically best suited for those with sizeable non-registered investments.

8 | How can I Utilize family trusts for income splitting

You can use family trusts to provide flexibility, control, protection, management and distribution of assets. Many retired Canadians need income to fund their own personal lifestyle and to help fund their children’s or grandchildren’s expenses and obligations. Utilizing a family trust can be an effective way to increase after-tax cash flow to the family.

9 | Generate tax-preferred income for nonregistered investments

This is ideal for retirees who own securities like stocks and bonds and rely on interest payments from fixed-income securities and consistent dividend payments from stocks. Alternatively, retirees can generate a more tax-efficient cash flow by incorporating systematic withdrawal plans (SWPs), or Series T mutual funds (that is, a return of capital) as part of their retirement income plan.

10 Strategize your retirement income with asset withdrawals

The most common financial assets are those that have been accumulated in RRSPs/RRIFs and TFSAs, as well as non-registered investments. There are two challenges:

• How to maximize the use of these various financial accounts in providing the most tax-efficient source of retirement income; and

• Choosing which assets to draw from first.

Ultimately, every retiree’s situation must be evaluated based on their personal circumstances. The traditional approach of deferring RRSPs as a last source of retirement income, to maximize tax-deferred RRSP/RRIF growth, may be suitable for some retirees, but not all. Retirees need an exit strategy with their RRSP that includes both a short-term and long-term approach to using these assets in retirement.

Key Takeaways

A| Deciding when you start receiving benefits can have lasting consequences for your retirement income

B| Retirees need an exit strategy with their RRSP that includes both a short-term and long-term approach to using these assets in retirement.

C| Advice from an advisor is worth it. You could retire 2x wealthier when you partner with an advisor.*

*Source: More on the Value of Financial Advice. CIRANO (2020).

For more information about these retirement income strategies and if they’re right for you, speak to Paul as we would be happy to discuss this or anything further with you.

The payment of distributions is not guaranteed and may fluctuate. The payment of distributions should not be confused with a fund’s performance, rate of return or yield. If distributions paid by the fund are greater than the performance of the fund, your original investment will shrink. Distributions paid as a result of capital gains realized by a fund, and income and dividends earned by a fund are taxable in your hands in the year they are paid. Your adjusted cost base will be reduced by the amount of any returns of capital. If your adjusted cost base goes below zero, you will have to pay capital gains tax on the amount below zero. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. This should not be construed as legal, tax or accounting advice. This material has been prepared for information purposes only. The tax information provided in this document is general in nature and each client should consult with their own tax advisor, accountant and lawyer before pursuing any strategy described herein as each client’s individual circumstances are unique. We have endeavored to ensure the accuracy of the information provided at the time that it was written, however, should the information in this document be incorrect or incomplete or should the law or its interpretation change after the date of this document, the advice provided may be incorrect or inappropriate. There should be no expectation that the information will be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise. We are not responsible for errors contained in this document or to anyone who relies on the information contained in this document. Please consult your own legal and tax advisor. This should not be construed to be legal or tax advice, as each client’s situation is different. Please consult your own legal and tax advisor.