How to reduce the tax payable on retirement income?
Retirement is subject to special taxation. In practice, gross retirement income (mainly consisting of pensions) is taxed less than earned income. If they pay roughly the same income tax, they are subject to a lower Generalized Social Contribution (CSG) and no – or minimal – social charges. Update on these taxes and how they affect your net retirement income.
The income tax scales apply in the same way to retirement pensions and earned income and the 10 % allowance, which the Tax Administration automatically applies. About the budget, the difference is in the ceilings and the minimum deduction amount.
When you are retired, you need to maintain a balance between an income strategy that meets your current cash flow needs and an investment strategy that aims to protect your ability to generate income in the future.
Tax saving strategies
You’ll also want to pay as little tax as possible to keep the most of your hard-earned savings. Here are four ideas to help you minimize taxes payable on your retirement income.
The following are exempt from income tax:
- The minimum old age (the Solidarity Allowance for the Elderly or Aspa, the Supplementary Disability Allowance (Asi) and the minimum old-age allowances);
- The increase for assistance from a third party, received by disabled retirees under certain conditions;
- Personalized autonomy allowance (Apa), paid to the elderly who need help daily;
- Retirement pensions below a certain threshold (€ 293.96 per month for a single person), when the beneficiary’s annual resources are below a particular ceiling (€ 10,881.75 for a single person, € 16,893.94 for a couple), since January 1, 2021;
- The combatant’s pension, the mutual pensions of veterans and the military invalidity pension;
- In general, social benefits for housing, family, invalidity and handicap.
Pension income splitting
It is a strategy whose objective is to reduce taxes by transferring retirement income (for tax purposes) from the partner with the higher income to the partner with the higher income weak.
The higher-income partner (common-law partner) can transfer up to 50% of their eligible pension income to the lower-income partner (common-law partner). If you are 65 years of age or older, qualified sources for pension income splitting include:
- A Registered Retirement Income Fund (RRIF).
- A registered pension plan.
- An annuity purchased with a written retirement savings plan ( RRSP).
If you are under 65, eligible income is mainly limited to benefits from a registered pension plan and certain payments resulting from the death of a former spouse or common-law partner. Note that residents of Quebec under the age of 65 cannot split pension income for provincial income tax purposes.
Withdraw income “in the right order.”
As a general rule, you should start by withdrawing funds from your non-tax deferred accounts, for example, your non-registered investment accounts.
The idea is to delay withdrawals from RRSPs and RRIFs for as long as possible, as the proceeds from those accounts are taxed as income, attracting the highest tax rate no matter how income. has been obtained. In addition, it allows these investments to continue to grow tax-free.
However, this rule is simplistic and too focused on reducing the current tax charge. Instead, your strategy will depend on the amount you have and the type of account in which it is held. The best solution may be to derive income from more than one source so that you get the best tax return this year and into the future.
The order of withdrawals that suits you will depend on several factors, including maximizing government benefits, such as the Quebec Pension Plan (QPP) or Old Age Security (OAS), or if the goal is to continue to grow your portfolio during retirement.
In addition, you will also have to take into account the income you receive that does not come from your investments, for example, rental income or income from part-time employment. Finally, your estate planning goals can also influence your strategy for the order of withdrawals.
Series “T” funds
The “T” Series may offer a more tax-efficient way to generate income from your investments for mutual fund investors. Series “T” funds are designed to provide predictable and sustainable cash flow, often a set percentage that helps with cash flow planning.
Depending on the income earned by the fund (usually interest and dividend income and capital gains), the fund might also distribute a portion of the investor’s original investment, better known as the return of capital. (RC)”. A return of capital is generally not taxable, which means that the amount is paid in a tax-efficient manner for you.
If you are not currently investing in Series “T” funds, you may be able to transfer to Series “T” of the fund you already own without triggering a tax event.
A quick word of warning: When you receive a return of capital distribution, you will decrease your security’s adjusted cost base (ACB). Which could have tax implications down the road. It should take care to plan and control the situation.
Investing in a TFSA During Retirement
Tax-Free Savings Accounts (TFSAs) can be helpful when you are retired because of their main advantage: Income earned in a TFSA is not taxable – even if you withdraw it (unlike RRSPs) and RRIFs). If you hold retirement assets in a non-registered account, it may be best to keep them in a TFSA (as long as the contribution does not exceed the limit) where they can generate income without risk tax.
Remember that the annual TFSA contribution limits are cumulative and that if your contribution room goes back to 2009, this limit reaches up to $ 75,500 in 2021.
TFSAs are also a great place to keep your money in retirement. It could be the amount you are required to withdraw from your RRIF but don’t need immediately or an amount you want to set aside for an emergency or to fund unforeseen expenses. By sheltering these amounts and their profits against tax, you ensure that you get the most out of all your savings.
What matters is personalization.
Every retiree finds himself in a unique situation, and no solution satisfies everyone. While it is essential to achieve tax-efficient cash flow, it is equally necessary to maintain an asset allocation that targets the long-term health of your portfolio and risk management as you see fit for the risk.
Most importantly, the goal is to enable you to have a retirement lifestyle that is enjoyable and sustainable. Professional advice from a tax expert and investment advice is needed to help you achieve the right balance.
The lifestyle of a retiree largely depends on the income he receives. And one of the ways to keep more of your income is to reduce taxes. Here are five tax reduction strategies you could talk to your advisor or tax professional about if you are or are about to retire.
Contribute to a registered spousal retirement savings plan (spousal RRSP)
Under the Canadian tax system, you and your spouse will pay less tax in retirement if you each earn $ 50,000 a year than if only one of you has an annual income of $ 100,000.
If you’re nearing retirement, one of the easiest ways to equalize your income is to contribute to a spousal RRSP: the higher-earning spouse contributes to their spouse’s RRSP.
Split your retirement income with your spouse or common-law partner
Do you expect your marginal tax rate in retirement to be higher than that of your spouse or common-law partner? You can lower your total tax bill if you have retirement income by allocating up to 50% of that income to your spouse.
Tax savings will depend on several factors, such as the difference between your marginal tax rates, but they can be substantial nonetheless.
You can also pay less tax by splitting your Canada Pension Plan (CPP) / Quebec Pension Plan (QPP) benefits with your spouse or common-law partner. This strategy is beneficial if you have contributed little to the CPP / QPP because you have worked little.
Withdraw your retirement savings in the correct order
Removing your assets in a particular order can help you keep more income. The tax implications of each type of withdrawal will differ depending on personal circumstances.
Still, you generally recommend that you withdraw retirement savings from the less flexible sources first, such as a registered retirement income fund (RRIF) or fund. Life income (LIF), which includes annual minimum withdrawals.
You can then withdraw the money from your TFSA (withdrawals are not taxed) or cash out non-registered investments (these are only partially taxed). Please consult your advisor or tax professional to find out in which order it will be more advantageous for you to make the withdrawals.
Use your other assets wisely
If you have other assets, you can use them to reduce tax. If, for example, you want to bequeath something to your children or loved ones, you can do so through the purchase of a life insurance policy, the transfer of assets, or the establishment of an investment. ‘a family trust, which will allow you to reduce taxes now.
Continue to contribute to your Tax-Free Savings Account (TFSA)
Since there is no age limit for contributing to a TFSA, you can continue to do so after retiring. And since TFSA contributions are not deductible, the income generated by the investments in the account grows tax-free. Also, since the money you withdraw from this account is not taxable, this income will not affect your marginal tax rate.
While it is not possible to avoid paying tax in retirement altogether, these strategies will help you minimize it. Remember, it’s not what you earn that matters; it’s what you have left.
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How to reduce the tax payable on retirement income