Planning for your retirement can be stressful enough without thinking about losing money on withdrawals. Before it comes time to use your retirement funds, it’s essential to understand how to maximize your benefits as part of your retirement planning.
Our simple guide to retirement income planning in Calgary will help you navigate acronyms and tax efficiency tips, and you’ll learn how to minimize tax implications when you withdraw money from your retirement savings to better plan your retirement roadmap.
Mandatory Withdrawals
Mandatory withdrawals: According to the Canadian Revenue Agency (CRA), you must convert your Registered Retirement Savings Plan (RRSP) into a Registered Retirement Income Fund (RRIF). At age 72, you must withdraw a minimum of 5.4% from your RRIF, based on the account value as of December 31st of the prior year. The withdrawal percentage increases each year up to a maximum of 20% at age 95 and older. The funds withdrawn are fully taxable.
Life Income Funds (LIFs), which hold pension proceeds, also set minimum and maximum withdrawal amounts.
How to Pay Less Tax on Retirement Income: Minimizing the Income Tax
One of the most important tips is the sequence in which you take money out of your retirement assets. Why? If you follow the right timing to withdraw your hard-earned money, you’ll pay less tax and avoid clawbacks (think Old Age Security) and in the end, you’ll have more money for the necessities of life.
If you’re unsure how to prepare for your retirement, Book a Free Discovery Call with one of our retirement specialists.
TFSAs Vs. Non-Registered Accounts
TFSA stands for tax-free savings account. It’s a fund that has zero tax implications: you can use it for a rainy day, an emergency fund, or whatever you want without paying any taxes. Your TFSA funds do not incur taxes and don’t impact your retirement benefits, and the amounts taken out don’t count towards taxable income. Even better, whatever amount you withdraw is added back to your contribution room as of January 1 of the following year. That means you can deposit that same amount again in January of the next calendar year.
Non-registered accounts: a flexible option for short- and long-term investing that has no contribution limits. Non-registered accounts let you save as much money as you want – there are no limits, penalties, or rules, and your funds can be held indefinitely. However, the money you invest is subject to tax when you earn an income on investments in the account (e.g., mutual funds). You can generate three types of income from a non-registered account: interest income, dividend income, and realized capital gains or losses. The two types of non-registered accounts are Cash and Margin.
One of the biggest opportunities to reduce taxes in retirement isn’t found in a specific investment, it’s found in deciding where your income comes from each year. The order in which you draw from your RRSPs, LIRAs, LIFs, non-registered accounts, TFSAs, and government benefits can have a significant impact on the amount of tax you pay over your lifetime.
For many retirees, strategically drawing down registered accounts before starting CPP, Old Age Security (OAS), or a defined benefit pension helps smooth taxable income, reduces the risk of OAS clawbacks, and allows indexed pension benefits to grow over time. For example if you defer CPP to age 70, your CPP payment will increase by 42% or 0.7% for each month that you defer. Similarly, deferral of OAS to age 70 will increase your monthly benefit by 0.6% per month that you defer to a maximum of 36%.
In other cases, drawing from non-registered investments or a TFSA may be the better choice, particularly when preserving income-tested benefits is a priority. The right strategy depends entirely on your personal circumstances, which is why careful withdrawal planning can add substantial value and help you keep more of the wealth you’ve worked so hard to build.
Pension Income Splitting to Lessen the Tax Burden
Income splitting is a tax strategy for couples to help ease the tax strain on your retirement wealth.
How it works: The spouse with the higher pension income can shift up to 50% of it to the lower-income spouse on paper, which can lower the couple’s overall tax bill.
Age Matters:
65 years and older: You can split withdrawals (RRIF), pension plans (Registered Pension Plan: RPP), and annuity payments from an RRSP.
Under 65 years: You can only split RPP income (Quebec is an exception for your provincial tax return) after a spouse’s death.
Build Your Retirement Plan Today
At Moraine Wealth Advisory, our retirement planning services meet you at every stage of life. Your personal roadmap reflects your unique circumstances and is worth careful planning. We help you develop a solid retirement strategy that will meet your needs for the rest of your life.
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Disclaimer: This article is for informational and educational purposes only and does not constitute individual financial, investment, tax, or legal advice. Strategies mentioned may not be suitable for all investors. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. We recommend consulting with a qualified financial professional or tax advisor regarding your specific circumstances before making any financial decisions.