Ep # 104 - Top Strategies to Reduce Taxes in Retirement
We dive into actionable strategies to help you save more money in retirement. From pension income splitting and maximizing tax credits to optimizing RRIF withdrawals and deferring government benefits, we break down key steps to reduce your tax burden and stretch your savings.
What You’ll Learn in Today’s Episode
Pension Income Splitting: Couples can reduce their tax burden by shifting pension income from a higher-earning spouse to a lower-earning spouse, potentially lowering overall household income and preserving tax credits.
Maximizing the Age Amount Credit: Retirees should aim to keep income below $44,000 to receive the full age amount credit, saving up to $1,300 in taxes, while avoiding clawbacks as income increases.
Deferring Government Benefits (CPP & OAS): Delaying CPP and OAS can lead to significant increases in monthly payments (7-8% per year) and better long-term financial security, especially when inflation is considered.
Optimizing RRIF Withdrawals: Retirees can strategically withdraw from RRIFs or RRSPs, either delaying for more tax-deferred growth or withdrawing earlier in low-income years to reduce overall taxes and fund tax-free savings accounts.
Strategic Charitable Donations: Donating appreciated investments instead of cash allows retirees to avoid capital gains taxes while still receiving full charitable tax receipts, maximizing the impact of their giving.
Ideas Worth Sharing
· "The big thing here is shifting income from one spouse to the other so we can lower the overall household income."*
· “Make sure you’re thinking about it in the broader sense of your financial plan—don’t just default to taking CPP as early as you can."
· “Even if you don’t need the income, shifting funds from your RRIF to a tax-free savings account can give you tax-free growth for life.”
· "It’s all about being intentional and making sure you’re not leaving money on the table.”
· "If you’re renovating your home to stay in it longer, make sure you’re getting as much money back from the government as you can.”
Resources
Ep # 18 – Canada Pension Plan and Old Age Security Timing
Maximize Your Income and Savings in Retirement
Retirement is supposed to be the best time of your life. After years of hard work, you finally have the freedom to pursue your dreams and passions. But there's one big question: Do you have enough money saved?
We explore some clever ways to maximize your income and savings in retirement. These tips, from strategic tax planning to smart investing, will help you maximize your retirement savings.
Pension Income Splitting
If you or your spouse receive pension income, you may be able to split this income to reduce your taxes. By shifting funds from the higher earner to the lower earner, you can minimize the taxes owed and potentially drop the higher earner into a lower tax bracket. This simple strategy allows you to keep more of your hard-earned pension.
Maximizing the Age Amount Tax Credit
Once you turn 65, you become eligible for the Age Amount tax credit, which can reduce your taxes by over $1,300 per year. However, this credit begins phasing out at an income of $38,000 and is eliminated entirely above $90,000. By optimizing withdrawals across different accounts like RRSPs and TFSAs, you may be able to minimize taxable income and retain access to this valuable tax credit.
Contributing to a Tax-Free Savings Account
The TFSA is one of the best retirement savings vehicles due to its tax-free growth. By continuing to maximize your annual TFSA contributions in retirement, you can shield investment gains from taxation. TFSAs also provide flexibility - you can withdraw funds anytime without triggering taxes. This makes them helpful in supplementing income in years when you need a boost.
Deferring OAS and CPP Payments
While it may be tempting to begin receiving CPP and OAS payments as early as possible, deferring these government pensions can really pay off. You'll receive higher monthly payments through increased longevity if you wait until 70 (for CPP) or 65-70 (for OAS) to start your pension.
Optimizing RRIF Withdrawals
The minimum withdrawals required from your RRIFs and annuities kick in at age 72. But before this deadline, strategic withdrawals from RRSP/RRIF can minimize your tax hit—withdrawals in low-income years, when your tax rate dips, help you avoid bracket creep. You can also consider withdrawing the $2000 pension tax credit each year and moving funds to a TFSA for tax-protected growth.
Utilizing the Home Accessibility Tax Credit
If you're planning home renovations to improve accessibility and safety as you age, don't forget about the Home Accessibility Tax Credit. You can claim up to $10,000 in eligible renovation expenses each year to receive a non-refundable tax credit. Common examples include walk-in bathtubs, wheel-in showers and chairlifts.
Claiming the Pension Income Tax Credit
Once you turn 65, up to $2000 per year of "pension income" becomes eligible for a non-refundable tax credit equal to 15% of the amount claimed. This includes RRIF withdrawals and annuity payments. To maximize savings, consider making a small RRSP/RRIF withdrawal each year after 65 solely to generate this credit.
Planning Charitable Donations Strategically
Rather than gifting cash to charity from your chequing account, consider donating investments directly from your non-registered account instead. This allows you to eliminate capital gains tax that would otherwise be owed on investment sales down the road. Not only do you get the charitable receipt for income tax purposes, but you also remove the embedded tax liability.
Work with a financial advisor to develop a customized strategy based on your personal financial situation and retirement vision. The time you invest now will pay off for years to come!