Tax Efficient Retirement Planning

Perhaps you have been diligently saving for your retirement in an RRSP. The benefit you receive now is a useful deduction from your income for tax purposes.  However, have you fully considered what happens from a tax perspective when you retire and start drawing from your retirement funds?  The tax effect of your retirement income should be a consideration so that you are not overpaying income taxes during your retirement years. 

Tax planning can be done at any time, whether you still have many working years ahead, are close to retirement or are already retired. There are many key personal facts that need to be considered to ensure you are investing and earning income in a tax efficient manner.  If you have not retired yet, have you thought about what retirement looks like for you?  What does your retirement lifestyle look like and how much money will you need?  Will you retire all at once or do you plan for a transitional period of part time work?  What type of commitments do you have i.e. grandchildren, medical needs.  All of these factors will affect how much and when you draw on your retirement savings on an annual basis.

A key aspect of efficient tax planning for retirement is tax bracket management. You have been enjoying the deduction from your RRSP contributions during your working years and may have focussed on maximizing your contributions to obtain the maximum deduction.  However, this could result in a substantial RRSP that will be converted to a RRIF by the end of your 71st year.  The minimum withdrawal from your RRIF is based on a formula as determined by your age and value of the RRIF assets.  Income from a RRIF is taxed as regular income as opposed to dividends or capital gains which receive more favourable tax treatment.  A sizable RRIF could result in an annual income taxable at a higher than expected income tax bracket.  There are ways to manage the impact of RRIF income such as withdrawing early and contributing to a TFSA. Making use of various types of investment accounts and holding various investments depending on the type of income will allow for a more efficient after-tax annual income.

Other issues to consider include managing your annual retirement income so that certain government programs such as OAS and the pension tax credit are not clawed back. Both of these programs are subject to an income test and if exceeded you will not receive them.  An analysis can be performed to determine the optimal time to start withdrawing from CPP, OAS and your RRIF account to ensure you receive maximum benefit.  Having a private pension plan will also affect your annual income and will be an important factor in managing your access to these government programs as well as income tax bracket management.

It’s never too early or too late to address the income tax implications of your retirement planning. We are happy to help you in planning for a tax efficient retirement.


The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

Posted: Thursday, February 15th, 2018 | Categories: Commentary.

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