Retirement Income Planning
Retirement Income Planning
By Nizam Shajani, CPA, CA, MBA, Partner
A transition into retirement should be accompanies by an income plan for this phase of life. A good understanding of taxes in retirement will facilitate tax saving strategies.
A retirement income plan should be planned to pay less tax, maximize government benefits, ensure that any tax benefits that accrue to a couple are maximized, and to minimize any claw-backs including Old Age Security (OAS) and the Age Amount Credit.
Income splitting with your spouse or common law partner allows the use of each individual’s bottom tax brackets and lowers the overall family tax burden. This can be achieved in retirement through an allotment of eligible pension amounts as well as sharing CPP (where both spouses are receiving CPP).
Income splitting may also be achieved from non-pension funds through spousal loans (using the prescribed rate of interest) to shift assets between spouses. For example, a shift of assets between spouses could include the transfer of a cottage from one spouse to another at fair value for cash to be used for investment purposes.
Paying down the debt of a spouse will reduce that spouses interest expense – this will not normally result in income attribution and may be beneficial where the interest was not deductible.
Another option may include dividend splitting from a holding company where both spouses are shareholders.
Moving funds outside of the two spouse or common law couple may also have tax advantages – such as setting up RESP’s for grandchildren or even gifting amounts to adult children or elderly parents.
A family trust may also facilitate the access and use of funds through retirement with income splitting opportunities with other family members. The trust may act as a legacy while achieving tax savings, as could funding life insurance policies for your children or grandchildren.
Gifts to adult children or elderly parents work best for low income students or parents, and can be used by children to buy a principal residence and ultimately claim the principal residence exemption.
Understanding how different types of income are taxed (ex. TFSA, RRSP, RRIF, LIRA, LIF, eligible dividends, interest, capital gains, mutual funds, etc.) and forced dates for conversions and minimal and optimized withdrawal amounts will also provide opportunities to plan for tax efficiencies.
For example, LIRA’s are not eligible for pension income splitting between spouses unless they have been converted into a Life Income Fund (LIF) and annuitized. Another noteworthy consideration is that eligible dividends are subject to a lower tax amount than interest income in most cases even when the gross up factor may cause the claw back of OAS benefits (your accountant will need to calculate if alternative minimum tax would then apply).
Other considerations including the tax impact of applying for CPP early (at age 60) at a reduced amount. Depending on circumstances, it may otherwise be beneficial to defer receipt of OAS and CPP thus increasing the amount of the benefit in a subsequent year.
Your retirement plan should also consider the amount of time spent outside of Canada or even within the United States. Avoiding U.S. residency rules/traps for snowbirds is also of concern. U.S. filing requirements under the substantial presence test (which can be costly) can be avoided by claiming a closer connection to Canada and filing a W8840 with the IRS or by claiming a treaty exemption.
One more tax savings consideration would consider setting up a foundation and making charitable contributions. There are existing private foundations that have been set up by brokers for donors who want to more fully participate in charitable decisions.
Retirement income planning is unique for most individuals depending on their circumstances. It is important to consult with a qualified and knowledgeable professional advisor when making plans for retirement to ensure you get the most out of your retirement income and assets.
This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action.