Tips for Retirees to Maximize Income and Minimize Tax
Hey retirees – are you maximizing your retirement income and minimizing your taxes? If you’re like most retired Canadians, you probably aren’t.
While each retiree’s situation is unique and individually tailored advice is always best, I have compiled a list of the top 5 things to consider to make the most of your retirement income plans:
1. Spread Income Out – It may make sense to spread your retirement income out over several years instead of having low income in earlier/later years and higher income in the others. This may require starting RRSP withdrawals earlier, spreading out a large capital gain or using TFSA funds to make a large purchase and then replenishing it down the road.
By spreading income out more evenly, you can often keep yourself in lower overall tax brackets, qualify for additional government credits/benefits and even lower your estate’s tax bill on death.
2. Split Your Income – When the current Federal government got rid of income splitting rules formerly known as the Family Tax Cut, many retirees thought that the pension income splitting rules were cancelled as well. Fortunately, this has not yet been cut and you should take advantage while you can.
Any qualifying income can be split as long as you meet the requirements, and this allows you and your spouse to have similar net income amounts instead of one of you being much higher and paying more tax.
If you are 65 or over, you can split income received from RRIF, LIF, annuities and other qualifying pensions. Those under 65 have more restricted qualifying income options. CPP and OAS payments can not be split but there are other options to split the CPP amounts through a different program.
3. Claim Your Credits – I’ve broken this down to highlight a few key ones:
– Retirees at least 65 years of age can often claim the non-refundable age tax credit though it is reduced when your net income is above $37,790 and eliminated once you pass the $87,750 threshold. Combined with provincial savings, this could be worth up to $1,600.
-Those still working may continue to claim the “Canada Employment Amount” of up to $1,222 – at a 15 per cent non-refundable rate, this may yield tax savings of up to $180.
-For those over 65 with eligible pension income, another non-refundable credit of 15 per cent is available on the first $2,000 of eligible income including RPP, RRIF, LIF or some GIC sources.
4. Create Pension Income – I mentioned the pension income tax credit above. Those over 65 with no eligible income should consider moving at least a portion of their RRSP account over to a RRIF, even if they don’t need or want income yet, to a RRIF to claim this credit.
5. Convert Your RRSP Early – Many retirees are often proud to say that they stopped working at age 60 or 65 but don’t need to start pulling money from their RRSPs until the mandatory age of 71. This may not be the best option though.
To qualify for many of the above-mentioned credits and tax rules, as well as to spread your income out evenly, it may make a lot more sense to convert at least some of your RRSP to a RRIF and take some income now.
You don’t necessarily need to spend that income now, it can always be reinvested in a TFSA or non-registered account. But the idea is to trigger some income now instead of a whole lot more at 71.
You’ve worked hard to build up your life savings, make sure that your retirement income plans are as efficient as possible so that you can properly enjoy the retirement you deserve.