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Retirement savings

April 16, 2019

How to keep more of your retirement income and pay less tax

Want to turn your savings into as much retirement income as you can? Try looking at your retirement income through a tax lens.

Congratulations! You’ve planned diligently for your retirement and you’re on track to meet your savings target. But planned savings is just the first half of your retirement picture. The other half is planned spending. That means working out a strategy for turning your savings into as much retirement income as you can.

How? One way is to think tax. That is, look at your retirement income plan through a tax lens.

Which types of retirement income get taxed?

To begin with, taxes work a bit differently in retirement. Like employment income, most retirement income is taxable. That includes Canada Pension Plan (CPP), Old Age Security (OAS) and company pension payments. It includes income from annuities and registered retirement income funds (RRIFs). It doesn’t, however, include withdrawals from your tax-free savings account (TFSA). But past a certain taxable income level, the government will ask you to return some of your OAS payments. If your income is high enough, you’ll have to give it all back. And generally speaking, past December 31 of the year you turn 71, you can’t use registered retirement savings plan (RRSP) contributions to reduce your tax bill.

Estimating taxes in retirement

How you pay your taxes works differently in retirement, too. When you were working, your employer probably deducted your income tax “at source.” It came straight off your paycheque and never went into your bank account. But as a retiree with no paycheque, you have several options for paying your taxes:

  • You can arrange for income tax to come off at source from your company pension, CPP and OAS.
  • You can pay tax on income from investments, rentals, self-employment or some pension payments in regular installments.
  • You can wait until you file your tax return to find out how much you owe. Bear in mind, though, that if you owe more than $3,000 in federal income tax ($1,800 for residents of Quebec) the Canada Revenue Agency (CRA) will require you to pay tax in installments. There are different thresholds for provincial and territorial tax, depending on where you live.

The good news is that there are withdrawal strategies and retirement-related tax deductions that you can use to help you keep as much of your money as you can.

Strategy no. 1: Create a plan with help from an advisor

Many of us will have several sources of retirement income. Along with CPP and OAS, you could have company pensions, annuities, RRIFs, a TFSA, rental properties, guaranteed interest products like GICs and more. To minimize the tax you pay, you can plan the order in which you draw from your income sources. You can also plan how much you’ll take from each.

Remember, everyone’s situation is unique. Getting good advice often proves priceless. A seasoned advisor can run the numbers in different scenarios to plan out the best withdrawal strategy for you. For example, your advisor can help you decide when to begin collecting your CPP and private pension incomes, as well as how to withdraw from your taxable investments.

If you expect to have multiple taxable investments, proportional withdrawals could make sense: You can withdraw a targeted amount from each source based on its share of your overall savings. This strategy can often spread out and reduce the tax impact, extending the life of your savings. Again, this is something your advisor can help you work out.

Strategy no. 2: Split your pension Income

Couples can split up to 50% of eligible pension income between them as long as the one sending income to the other is at least age 65 during the year. That could be a real tax saving if one of you has a significantly higher income than the other. And if you share a certain percentage one year, you don’t have to share the same percentage the next year. That gives you flexibility. Remember to get independent tax advice on splitting income, to make sure you do it right.

Strategy no. 3: Buy an annuity

Are you concerned about your retirement savings running out? Think about using some of your savings to buy a life annuity. A life annuity will give you tax-effective retirement income for the rest of your life. A “term certain” annuity will pay you for a certain period (like 30 years). Both types spread out the income from your retirement savings to lessen the tax you pay each year. If you buy an annuity with “non-registered” money (from investments outside of an RRSP, or from your savings account, for example), only part of the income you get from it is taxable. (How much and when depends on the tax treatment the annuity qualifies for.) If you buy an annuity with registered money, the income from it is fully taxable in the year you get it. If you’re using RRSP money, the Income Tax Act also specifies how long the term certain or guaranteed period can be for a term certain or life annuity, respectively.

Strategy no. 4: Take advantage of tax breaks

You may have taken advantage of various tax deductions and credits while you were working. Now it’s time to pay close attention to those that apply to retirees. The pension income amount, for example, is a credit that you could get if you received eligible pension, superannuation or annuity payments other than CPP or OAS. Using the credit can save you about $300 in taxes on your federal tax return, You can also save more on your provincial or territorial return, depending on which province or territory you live in. Other potential tax savings include:

  • the age amount
  • the home accessibility tax credit
  • the medical expense tax credit
  • the disability tax credit

An accountant can help you navigate the long list of allowable federal tax credits and deductions. You can also get help finding ways to save on provincial taxes, such as the Ontario Senior Homeowners’ Property Tax Grant.

A well-crafted tax strategy can help ensure your money lasts as long as you need it. For retirement income management advice that will work for your unique resources and goals, speak with an advisor.

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