Drawing on your investments during retirement
To supplement your other sources of income, you will probably need to draw additional retirement income from your registered and non-registered investments.
How you choose to do that may have a big impact on the stability of that income and on the size of your tax bill.
As you move closer to retirement age, you'll be drawing on your accumulated wealth to meet retirement expenses — and with average life expectancy rising, that could be for many years.
That's why it's a good strategy to balance between capital preservation with less volatile investments that produce a regular and stable income, such as fixed income and dividend-producing investments and growth investments that can add to your retirement income and protect against inflation.
The impact of taxes on your retirement income depends on the sources of that income. For example, if you generate your retirement income from a non-registered investment source that produces interest, the resulting income will be fully taxable. However, if your income is derived from selling non-registered equities the profit is a capital gain and the tax rate is reduced to 50 per cent. Be aware that reporting large amounts of taxable income from all sources can result in the reduction of income-tested government benefits such as Old Age Security (OAS).
There is also the taxing question about when and how to dispose of assets.
Through years of investing, you may have accumulated sizable unrealized capital gains. If you choose to realize them in a single year through a one-time disposition — for example to fund an annuity — the result could be a significant tax hit.
Instead, develop a tax-reduction strategy now that will minimize taxes before retirement and through all your retirement years.
One strategy is to hold relatively more equity investments in the non-registered part of your portfolio and relatively more fixed-income securities in registered investments. This strategy preserves the tax advantages of equity investments over fixed income investments.
When you know the right tax-reducing conversion strategies and remain vigilant about paying less tax you'll preserve your wealth and make your retirement as fulfilling and worry-free as possible. Your professional advisor can help you seize all of the tax strategies available to you and develop an investment approach that works best for you.
J. Kevin Dobbelsteyn is a certified financial planner with Investors Group Financial Services Inc. His column appears every Wednesday.