Five ways to pay less tax in retirement

February 01, 2024 | RBC Wealth Management


These strategies can help you maintain the lifestyle you had while working.

Five ways to pay less tax in retirement

Taking home more income during your retirement can make all the difference in the type of lifestyle you get to enjoy. And one way to keep more of your earnings is to minimize the taxes you pay.

Here are five strategies to consider if you’re retired or getting close.

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.

A version of this article was first published on .

This document has been prepared for use by the RBC Wealth Management member companies, RBC Dominion Securities Inc.*, RBC Phillips, Hager & North Investment Counsel Inc., RBC Global Asset Management Inc. Royal Trust Corporation of Canada and The Royal Trust Company (collectively, the “Companies”) and their affiliate, Royal Mutual Funds Inc. (RMFI). *Member – Canada Investor Protection Fund. Each of the Companies, RMFI and Royal Bank of Canada are separate corporate entities which are affiliated. “RBC advisor” refers to Private Bankers who are employees of Royal Bank of Canada and licensed representatives of RMFI, Investment Counsellors who are employees of RBC Phillips, Hager & North Investment Counsel Inc., Portfolio Managers who are employees of RBC Global Asset Management Inc., Senior Trust Advisors and Trust Officers who are employees of The Royal Trust Company or Royal Trust Corporation of Canada, or Investment Advisors who are employees of RBC Dominion Securities Inc. In Quebec, financial planning services are provided by RMFI which is licensed as a financial services firm in that province. In the rest of Canada, financial planning services are available through RMFI, Royal Trust Corporation of Canada, The Royal Trust Company, or RBC Dominion Securities Inc. Estate and trust services are provided by Royal Trust Corporation of Canada and The Royal Trust Company. If specific products or services are not offered by one of the Companies, clients may request a referral to another RBC partner. The strategies, advice and technical content in this publication are provided for the general guidance and benefit of our clients, based on information believed to be accurate and complete, but neither the Companies, RMFI, nor Royal Bank of Canada, nor any of its affiliates nor any other person can guarantee accuracy or completeness. This publication is not intended as nor does it constitute tax or legal advice. Readers should consult a qualified legal, tax or other professional advisor when planning to implement a strategy. This will ensure that their individual circumstances have been considered properly and that action is taken on the latest available information. Interest rates, market conditions, tax rules, and other investment factors are subject to change. This information is not investment advice and should only be used in conjunction with a discussion with your RBC advisor. None of the Companies, RMFI, Royal Bank of Canada nor any of its affiliates nor any other person accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. In certain branch locations, one or more of the Companies may carry on business from premises shared with other Royal Bank of Canada affiliates. Notwithstanding this fact, each of the Companies is a separate business and personal information and confidential information relating to client accounts can only be disclosed to other RBC affiliates if required to service your needs, by law or with your consent. Under the RBC Code of Conduct, RBC Privacy Principles and RBC Conflict of Interest Policy confidential information may not be shared between RBC affiliates without a valid reason. ® / ™ Trademark(s) of Royal Bank of Canada. Used under licence. © Royal Bank of Canada 2024. All rights reserved.

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