How To Minimize Tax On Retirement Income

Ah, its tax time, and in our home there is a lot of discussion around the latest rules and next steps.

This month Marci, gives us a few tips for minimizing the tax we pay on our retirement income.

These tips provide a good basis for conversation with your wealth management partner or tax specialist.

Marci Perreault is a partner at KenMar Financial Services, and is available to discuss any aspect of your portfolio.

How To Minimize Tax On Retirement Income

By: Marci Perreault

When you’re retired, you need an income strategy that balances today’s cash flow needs with an investment strategy to safeguard your ability to produce income in the future.

Tax-saving strategies

You will also want to pay as little tax as possible so that you keep more of your hard­ earned savings. Here are four ideas to help you minimize the tax on your retirement income.

Pension income splitting

This is a strategy for couples to reduce taxes by transferring pension income (for tax purposes) from the higher income earner to the lower income earner. The transferring spouse or common-law partner can give up to 50% of their eligible pension income to the receiving spouse or common-law partner. If you are 65 years of age or older, eligible sources for pension income splitting include a Registered Retirement Income Fund (RRIF), a registered pension plan and an annuity purchased with a Registered Retirement Savings Plan (RRSP). If you are under age 65, eligible income is mainly limited to registered pension plan benefits and certain payments resulting from the death of a former spouse or common-law partner. Note that residents of Quebec under 65 cannot split pension income for provincial income taxes.

Withdrawing income in the right order

The traditional rule of thumb is to withdraw first from accounts that are not tax-deferred, such as your non-registered investment accounts. The idea is to put off withdrawals from RRSPs and RRIFs, where all proceeds are taxed as income, attracting the highest rate of tax regardless of how they were earned. It also allows those investments to continue to grow tax deferred.

The truth is that this rule is simplistic and overly focused on current tax savings. Your strategy really depends on how much you have and where those assets are held. It may be that income should be drawn from a mix of sources to achieve the best tax-efficiency both in current and future years. The right order for you will also depend on a number of factors, including whether maximizing government benefits such as the Canada Pension Plan (CPP) and Old Age Security (OAS) is a goal, if you want or need to keep your portfolio growing in retirement, and if you have non-investment income such as rental income or part-time employment income. Estate planning goals may also affect your withdrawal order strategy.

T-series funds

For mutual fund investors, T-series may provide a more tax-efficient way to generate income from your investments. T-series funds are designed to provide a predictable and sustainable cash flow, often at a set percentage which helps with cash flow planning. Depending on the fund’s earnings (usually interest income, dividends and capital gains) the fund may also distribute a portion of the investor’s original investment, known as Return of Capital (ROC). ROC is usually not taxable, resulting in a more tax-efficient payout for you.

If you are not currently in T-series funds, it may be possible to transition to the T-series version from the series of the fund you currently hold without triggering a tax liability. One word of caution: when you receive an ROC distribution, you will lower the Adjusted Cost Base (ACB) of your holding, which could have tax implications later. Careful planning and monitoring are required.

TFSAs during retirement

Tax-Free Savings Accounts (TFSAs) can play a useful role after you’ve retired because of their principal benefit: money earned inside the account is not taxable – even when you withdraw it (unlike RRSPs and RRIFs). If you have retirement assets in a non-registered account, they may be better off in a TFSA (up to the contribution limits) earning income tax-free. Remember that TFSA contribution limits are cumulative and provide room of up to $81,500 as of 2022 if you’ve been eligible to contribute since 2009.

TFSAs also provide a great place to “park” money in retirement. This could include money that you have been required to withdraw from your RRIF but don’t have an immediate use for, as well as money put aside as an emergency fund for unexpected expenses. By sheltering these funds and their profits from tax, you’ll ensure you get the benefit of all your savings.

Customization is key

Every retiree’s situation is unique and there is no “out-of-the-box” solution. While obtaining tax-efficient cash flow is an important goal, so is maintaining the right asset allocation for your portfolio’s long-term health and managing risk according to your own risk tolerance. Most of all, it’s about enabling you to have an enjoyable and sustainable retirement lifestyle. Professional tax and investment advice are needed to achieve the right balance for you.

Should You Help Your Child Buy a Home?

I’ve been noticing that in the last several years, more parents and retirees are inquiring about, and making the decision to, assist their children in purchasing their first home. Perhaps you are contemplating this decision right now, and this trend resonates with you. It isn’t a decision that should be taken lightly, and it will require some research into how it will affect the health of your retirement portfolio or further, how it will affect the length of time you will need to continue working if the funds are withdrawn.

If there are questions you may have about the benefits and risks of such a decision, I am happy to discuss options with you.

Click Here to Learn More

Introducing Marci Perreault, Certified Financial Planner

This month, we introduce Marci Perreault to our Wellings blog.

We recently talked to Marci about the role she plays in helping her clients and seniors navigate the financial maze.

For over 25 years Marci has guided her clients to make informed decisions when it comes to protecting themselves.

“Knowledge is a powerful thing, and with so much false information out there, it’s important you are working with someone you can trust. Someone that understands your goals and the assets available that will get you closer to them. 

Clarity is important when making some very important choices about your wealth, your life and even your legacy.

People don’t wait days or weeks to hear from me. I am constantly upgrading my skills and knowledge to stay on top of changes to investment and insurance tax laws, government rulings, and new financial products, I will review your financial picture to take full advantage of changes while complying with changes within the financial services industry.

My experience in the financial services field has only deepened my belief that each individual needs a unique plan, one that is tailored to their personal situation. Everybody is different. Each client wants different things for retirement. There is no cookie cutter plan that fits every person.”

It would be my pleasure to take your call, answer your email, and review your goals against your current portfolio.

Specialties: Wealth Management Services, Living benefits, Income Replacement Strategies, Estate Planning, Risk Management, Group Benefits.

This months blog:

Think trusts are only for the rich and famous? You’ll see a variety of uses that show why trusts can meet the estate planning needs of just about anyone. It’s worth a second thought, and a conversation with your financial planner.

http://advisor.assante.com/JohnDoeIIROC/blog/112730-

Marci Perreault, FLMI, CHS, CFP
Certified Financial Planner
KenMar Financial Services
Assante Financial Management Ltd.
Suite 300, 68 Chamberlain Ave
Ottawa ON K1S 1V9
Phone 613-231-7700 EXT 223

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