Once someone or a couple together reach the age of 72, the flexibility to reduce your taxes paid becomes more difficult. At this point you are already collecting CPP and OAS, you are making your minimum withdrawals from your RRSP/RRIF and you no longer have the ability to make contribution to tax-sheltered accounts. Nonetheless, there are tried and true strategies that people can use in retirement to maximize their after-tax retirement income.
The higher earning spouse can contribute to an RRSP of the lower earning spouse and still receive their full tax deduction. The lower earning spouse can then withdraw the money in retirement and pay tax at their marginal tax rate, lowering the overall effective tax rate for the couple.
Order of Withdrawal
Following a tax efficient withdrawal strategy can lower your taxes payable. General guidelines include making withdrawals in the following order:
- Required Minimum from Matured Registered Accounts (RRIFs, LIFs and LRIFs)
- Liquidate Losses in Non-Registered Accounts
- Liquidate Non-Appreciating Investments and Cash Balances
- Draw Down TFSAs
- Trigger Capital Gains in Non-Registered Accounts
- Withdraw from Registered Accounts
Any withdrawal strategy needs to be customized to the client situation and it should not change a client’s overall investment strategy.
Where you hold investment assets matters! For example, if someone has both registered and non-registered accounts, they should consider purchasing investments that earn Canadian dividend, capital gains or return of capital income in a non-registered account. This income is taxed more favourable by the CRA than other investment income.
- Fixed income
- Interest-bearing investments have the least favorable tax treatment
- Should be in tax deferred or tax-free accounts
- Canadian stocks (and foreign stocks with low or no dividends)
- Dividends from Canadian stocks and realized capital gains are the most favorably taxed kinds of investment income.
- Non-registered accounts
Note: Owning individual securities allows for high diversification, lower transaction costs and the ability to control the size and timing of taxable events
- Preferred Shares
- Considered a fixed income investment, but payouts are eligible for the dividend tax credit
- Non-registered accounts
- They pass along most of their cash flow to investors, making them attractive to income-oriented investors.
- Mix of capital gains, interest/rental income and return on capital. Income and deductions retain their character as they flow through to the investor
- Tax deferred or tax-free accounts
You can share up to 50% of your CPP income with your spouse. The amount of the benefit depends on the number of years the spouses have been married and the number of years they have contributed to the CPP. Both spouses must be at least 60 years old and have elected to begin their CPP benefit.
Utilizing Surplus Assets
If you have enough assets to meet your retirement income needs, then consider directing the surplus to either a Tax-Exempt Life Insurance Policy or giving a Gift to family members.
- Tax Exempt Life Insurance Policy – Investment income can grow tax free and death benefits can flow tax free to beneficiaries.
- Lifetime Gifts – there is no attribution on income earned on the gifted funds if the family member is 18 years or older
If you are not satisfied with your income in retirement, you can immediately increase it by purchasing a prescribed annuity. You will pay less tax on the monthly annuity payments because a portion of it will be considered a return of capital.
Note: it is not advisable to invest all savings into an annuity, as the decision is irrevocable, and you cannot access the capital during your lifetime.
Planning Your RRIF Minimum Withdrawals
- Base your minimum withdrawals on the age of the younger spouse to minimize the annual percentage withdrawals amount
- Convert your RRSP to a RRIF at 71, but don’t make your first withdrawal until the year you turn 72
- Withdraw the annual required minimum from the RRIF as a lump sum at the end of each year