We recently came across an article from RBC that combined these and outlined 5 different strategies to pay less tax in retirement. All of these strategies are ones that we regularly build into our client retirement cash flow plans and financial plans. If you have any questions about any of these strategies, let us know at boschmanwealth@rbc.com and we would be happy to discuss them with you.
1. Contribute to a spousal Registered Retirement Savings Plan (RRSP)
Under Canada’s tax system, you’ll pay less tax as a retired couple if you each earn $50,000/year than if one of you alone earns $100,000/year. If you’re approaching retirement, one of the easiest ways to even out your future income is by making contributions to a spousal RRSP, where the spouse earning the higher income contributes to the lower-earning spouse’s RRSP. If you’re the one making the contribution, you’ll claim it on your tax return, reducing your taxable income that year. Meanwhile, the contribution itself will be deposited into your spouse’s RRSP. The goal is to keep contributing until your expected retirement income is about the same as your partner’s.
2. Split pension income with your spouse/common-law partner
Do you expect to be in a higher tax bracket than your spouse or common-law partner in retirement? If you receive pension income, you can reduce your total tax bill by allocating up to 50 percent of that income to your spouse. The amount of tax savings can vary widely, and it depends on several factors—like the difference in your marginal tax rates—but the savings can be significant. You can also save on taxes by sharing your Canada Pension Plan (CPP)/Quebec Pension Plan (QPP) with your lower-earning spouse or common-law partner. This strategy is especially helpful if one spouse or partner doesn’t have much work history (and has limited contributions to CPP/QPP).
3. Withdraw your assets in the right order
Implementing this strategy may help you keep more of your income. While the tax implications of each type of withdrawal will vary depending on your individual situation, the general guidance is to use your least flexible sources of income first, such as a Life Income Fund, which have minimum annual withdrawal requirements. Next, you could withdraw assets that aren’t as heavily taxed, such as your Tax-Free Savings Account (withdrawals aren’t taxed at all in this case) or any non-registered investments (these are only partially taxed). It’s a good idea to talk to your advisor and tax professional to work out the order of withdrawals that’s best for you.
4. Have extra assets? Use them wisely
If you’re fortunate enough to have additional funds or assets, you can use them in a way that will cut down on your taxes. For example, if you want to leave a gift to your children or loved ones, you could buy a life insurance policy, gift assets or set up a family trust. Choosing this route can help ensure they receive this wealth (either now or in the future), and reduce the tax you must pay today.
5. Keep contributing to your Tax-Free Savings Account (TFSA)
Because there is no age limit on when you can make TFSA contributions, you can keep adding funds to this account during retirement. While TFSA contributions aren’t tax deductible, the income and gains made in the account grow tax-free. What’s more, any money you withdraw from your TFSA isn’t taxable, so that income won’t impact your tax bracket or marginal tax rate. While you won’t be able to avoid paying taxes in retirement altogether, these strategies can maximize your after-tax retirement income.
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