Tax planning is boring and absolutely necessary at any age but especially after you retire. So let’s look at some tax-management strategies aimed at maximizing your retirement income.
Split pension income You could reduce your family’s total tax liability by allocating up to 50 per cent of your eligible pension income (which includes monthly pension payments and, where you are at least age 65, RRIF income) to your lower-income spouse/partner for taxation purposes.
Share CPP/QPP benefits Sharing these with your spouse/partner can save significantly on taxes.
Plan RRIF withdrawals These withdrawals are fully taxable, so manage your taxable income by withdrawing as little as possible each month.
Take advantage of all your tax credits Federal tax credits (some with equivalent provincial credits) reduce the amount of tax you pay. Use all that apply to you including the Pension Income Credit, Age Credit, Medical Expense Credit, Disability Credit, and Charitable Donations Credit, among others.
Use efficient asset allocation Reduce taxes by keeping fully-taxable, interest-generating investments inside a tax-sheltered RRSP, RRIF or TFSA, eligible investments and assets that generate capital gains or Canadian dividends and are taxed less outside your registered plans.
Use the Rule of 71 Take full advantage of the tax-sheltering benefits of your RRSP by making your maximum contribution up to the end of the year you turn 71, at which time you will be required by the government to wrap up your RRSP(s) and convert the proceeds, usually to a RRIF. After age 71, consider putting any extra money into a Tax-Free Savings Account (TFSA) where the funds can continue to grow tax-free, and/or contributing to a spousal RRSP until your spouse/partner turns 71.
Consider a guaranteed investment fund This is a “segregated fund” that contains a guaranteed minimum withdrawal benefit, so you can enjoy the potential investment growth of a mutual fund along with a guaranteed regular income which will not decrease.
Consider a Monthly Income Portfolio This mutual fund option is more flexible and tax-advantaged than other non-registered options, like a Guaranteed Investment Certificate (GIC) which locks in your money while locking it out of potentially higher returns and creating an immediate tax bill on redemption. A Monthly Income Portfolio is designed to provide maximum investment returns along with a monthly income, a part of which is treated as return on capital — a tax-deferral strategy that can increase your after-tax monthly income.
Tax planning might be boring, but saving on taxes never is. Your professional adviser can help ensure you get the most out of all tax-reduction strategies for all your retirement years.
J. Kevin Dobbelsteyn is a certified financial planner with Investors Group Financial Services Inc. His column appears every Wednesday.