Essential tips and tricks for paying less tax and keeping more of your retirement income

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Essential tips and tricks for paying less tax and keeping more of your retirement income

Most of your retirement income sources are taxable; Canadian Pension Plan (CPP), your personal pension plan (if you have one) and income from your RRIFs. However, if you’ve set up a TFSA in addition to your RRSPs, then you’re in luck – money you take out of your TFSA isn’t taxable!

We have some tips on combining savvy withdrawal strategies with retirement-related tax deductions to keep more of your retirement income.

Make a Plan

Determine all the different sources of retirement income you’ll have – don’t forget about things like annuities, GICs or income from a rental property if you have one. Once you have a complete list, a professional financial advisor can give you tips on when it’s best to start collecting pension income as well as how much to withdraw from your taxable investments. A strong plan can help reduce the amount of tax you have to pay and extend the life of your retirement income!

Split your pension income

If you have reached the age of 65 and have a pension, you can split up to 50% of the pension income with your spouse. Splitting your pension with a lower-income spouse can add up to savings, as this will cut down on the amount of taxes you’ll have to pay overall.

While rewarding, the process to split your pension income can be complicated, so it’s best to get professional advice before starting this process.

Buy an annuity

Annuities are a financial product that will provide you with a guaranteed regular income – a good choice if you are worried about your retirement savings running out.

These are the most common types of annuities:

  • Life annuities provide you with a guaranteed lifetime income, with the option for the annuity to be paid to a beneficiary after you die.

  • Term-certain annuities provide guaranteed income payments for a fixed period. A beneficiary or your estate will receive regular payments if you die before the term ends.

  • Variable annuities will provide you with both a fixed income and a variable income. The variable income will be based on the return of the annuity provider on the performance of the investments your annuity provider invests your money in.

All types of annuities will spread out the income from your retirement savings to lessen the tax you pay each year.

Take advantage of tax breaks

Now that you’re retired, there are retirement-related tax breaks you need to know about. Here are some of the tax breaks or credits you may be eligible for:

  • The age amount

  • The home accessibility tax credit

  • The medical expense tax credit

  • The disability tax credit

  • The pension income tax credit

We can help!

We can put together a plan that helps you keep more of your retirement income – call us today!

How the Pension Income Tax Credit can benefit you

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You work hard for your money. You want to keep every penny of it that you can, especially when you’re approaching your retirement years!

One of the ways you can do this is through the Pension Income Tax Credit.  Even if you’re still actively working, there are several ways you can take advantage of this tax credit.

What is the Pension Income Tax Credit?

The Pension Income Tax Credit enables anyone 55 and up to save on their taxes. Anyone who qualifies for it can apply for a tax credit on their first $2,000 pension income.

To qualify for the Pension Income Tax Credit, you must be:

  • 55 or older (however, you must be 65 or older to have a broader range of income qualify)

  • Earning income that qualifies as pension income

The Pension Income Tax credit is non-refundable, and you cannot carry it over.

What does the government consider eligible pension income?

That depends on your age.

If you are over 55 but below 65, then only the following count as pension income:

  • Annuity income you receive due to the death of your spouse – for example, from an RRSP, RRIF, or a DPSP.

  • Income from a superannuation, Canadian pension plan, and certain foreign pensions

  • Income received from splitting pension income

If you are 65 or over, then all of the following count as pension income:

  • Income from a Registered Retirement Income Fund (RRIF), Life Income Fund (LIF) or Locked-in Retirement Fund

  • Income from a superannuation or pension fund

  • Annuity income from an RRSP or a Deferred Profit-Sharing Plan (DPSP)

  • Income received from splitting pension income

  • Interest from regular annuities

  • Income from foreign pensions

  • Interest from a non-registered GIC offered by a life insurance company

How can I take advantage of the tax credit?

Even if you are still actively working at 65, it makes sense to take advantage of the Pension Income Tax Credit.

Here are four ways you can do it if you are not part of a pension or superannuation plan.

  • Open a RRIF. Put $12,000 into it from your RRSP. You can then take out $2000 each year tax-free from it.

  • Transfer money from a LIRA to a LIF. As with the RRIF, you can withdraw up to $2000 each year tax-free.

  • Purchase a GIC through a life insurance company. To claim the full credit, you’ll have to invest enough that you would earn $2,000 in interest each year.

  • Transfer the credit to a spouse if you cannot use it.

The Takeaway

Even if you are still working at 65, it makes sense to take advantage of the Pension Tax Income Credit. There are a variety of ways to bring extra income into your life tax-free! Contact us or your tax advisor for more information about how to get started.

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