How to lower your taxes in retirement

Though many Canadians are steadily saving up for their retirement, fewer are aware of how they’ll continue to pay taxes upon leaving the workforce. Your annual registered retirement savings plan (RRSP) contributions, for instance, are tax deductible at the time, but are subject to tax upon withdrawal. You’ll also be dinged while receiving Canada Pension Plan (CPP), while fifteen cents of every dollar you collect through Old Age Security (OAS) payments is clawed back once you cross a net income threshold of over $79,000. Though you can’t avoid paying your taxes altogether, and we know you wouldn’t even want to, the good news is that there are many strategies you can use to lower the hit and hang onto your income in your golden years. In partnership with Fidelity Investments, we present just a few of many the ways you can save.

Know when to draw money from your various investments/Withdraw assets in the right order

Planning out just how you wind down your various assets and investments throughout retirement can be beneficial towards lowering your taxes, and taking home more income. In retirement, the goal is to optimize your cash flow while minimizing taxes. Depending on your income situation, you’re ideally looking to withdraw money from the least flexible sources of income inside an RRIF before tapping into sources that are less heavily taxed. Since you’ll need to draw down a stipulated amount from your RRIF each year, a non-negotiable rate that increases annually until the age of 90, draw down taxable resources like mutual funds or GICs ahead of the tax free nest egg growing in your TFSA.

Pension-splitting

Another potential tax-saver couples can look to is pension splitting, especially if one partner earns significantly more than the other. Canadian couples can split up to 50 per cent of their eligible pension income, including RRIF withdrawals, RRSP withdrawals before the age of 71, and lifetime annuity benefits. Let’s say your taxable income comes in at $80,000 a year, while your partner’s taxable income is only $30,000. The higher earning partner can reduce their marginal tax rate by transferring up to 50 per cent of eligible income to their spouse. Shifting income this way has the ability to reduce the overall taxes paid by the household more so than if you were to claim your incomes separately.

Additionally Many Canadians don’t know that there are tax credits you can claim as retirees. The federal government, for instance, offers a non-refundable Pension Income Credit of 15% on the first $2,000 of eligible pension income (including RRIFs and annuities).

Continue investing in your TFSAs

CRA regulations stipulate that retirees must convert their RRSP savings into RRIFs by the end of the year in which the owner turns 71, and the following year begin drawing down a minimum prescribed rate from those earnings. That said, there is no upper-limit age when it comes to contributing to a Tax Free Savings Account. After the funds withdrawn from your RRIF have been taxed, the proceeds could potentially be reinvested into your TFSA, so long as you haven’t already reached your annual TFSA contribution limit ($6,000 in 2020). The strategy here is that by withdrawing taxable income from within your RRIF and placing it into your TFSA, you will ultimately be lowering the balance your family would pay upon your death, through your terminal return. Even if you were to go above the minimum prescribed annual withdrawal rate of your RRIF, paying a bit more in taxes in those particular years, the estate will be taxed less on the final RRIF balance, since money has been shifted tax-free into the TFSA.

Investing in annuities

Term-certain and life insurance annuities can be attractive to retirees as another way to keep money flowing on a monthly or annual basis, and can likewise come in handy come tax season. The key here is how you go about setting up your annuities. Whether you’re paying your provider up front in a lump sum or topping the annuity up with ongoing payments, if you’re using money from an RRSP or any other registered investment, all amounts received from the annuity— including the accumulated interest—will be taxable. Only a portion of the annuity will be taxed were you to pay for it with non-registered investments.

Build a strong financial plan with the help of an advisor

Looking over your various assets and investments can be overwhelming, and it’s easy to miss out on tax-lowering opportunities if you don’t know where to look. Speaking with an advisor brings objective expertise to your unique financial situation, and they can help with reaching financial goals, managing assets, restructuring and maximizing your portfolio, and lowering your taxes. A little professional advice can provide long-term comfort as you settle into retirement.