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5 Ways to Pay Less Tax in Retirement

Taking home more income in retirement can make all the difference in the type of lifestyle you get to enjoy. And one way to keep more of your income is to minimize the taxes you pay. Here are 5 tax-saving strategies to ask your advisor or tax professional about if you’re retired or getting close:

  1. Contribute to a Spousal Registered Retirement Savings Plan (RRSP)

Under Canada’s tax system, you will 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 higher income spouse contributes to the lower-income spouse’s RRSP.

If you’re the one making the contribution, you will 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.
  1. Split pension income with your spouse/common-law partner

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% of that income to your spouse. The amount of tax savings can vary widely, and it depends on a number of 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-income 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).

  1. Withdraw your assets in the right order

Just withdrawing your assets in a certain order can help you keep more of your income for yourself.

While the tax implications for each type of withdrawal will vary depending on your individual situation, the general rule of thumb is to use your least flexible sources of income first—like a Registered Retirement Income Fund (RRIF) or Life Income Fund (LIF), which have minimum annual withdrawal requirements. Next, it’s smart to follow with those assets that aren’t as heavily taxed, such as your TFSA (withdrawals aren’t taxed at all) 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.

By the end of the year in which you turn 71, you need to convert your RRSP to a RRIF and any locked-in retirement accounts (LIRAs) to a LIF or Life Annuity.

With both a RRIF and a LIF, there are minimum annual payments you need to take, which are calculated based on your age and other factors. Because of these requirements, it’s best to start with these accounts when putting together your retirement income, and top up as needed with other sources.

  1. Have extra assets? Use them wisely

If you’re fortunate enough to have extra funds or assets that you won’t need, you can use them in a way that will cut down on your taxes. For example, if you want to leave something to your kids or other loved ones, buying a life insurance policy, gifting assets or setting up a family trust can help ensure they receive the assets (either now or in the future), while reducing the tax you have to pay today.

  1. Keep contributing to your Tax-Free Savings Account (TFSA)

Because there is no upper age limit to TFSA contributions, you can keep contributing to this account in retirement. While TFSA contributions aren’t tax deductible, the income and gains made in the TFSA 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. Remember, it’s not what you earn, but what you keep that matters!

What to Check out Next

RRIF Tips and Hints

How Do I Know When to Take My CPP/QPP?

How to Create a Steady Income in Retirement

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