June 17, 2024

Why tax planning is a different game once you’re retired

Tax planning is something that’s pretty easy to handle when you’re working – especially if you have just one employer making deductions from your pay.

But once you’ve retired, The Globe and Mail reports, it’s a whole new ball game.

“For many working Canadians, filing taxes is relatively straightforward: You get a T4 slip from your employer, maybe make a deduction for contributing to your registered retirement savings plan (RRSP), and perhaps claim the odd credit, depending on the current tax rules,” the Globe article begins.

“However, your tax picture can get more complex in retirement, given the new and varied income sources. These often include workplace pensions, RRSPs, registered retirement income funds (RRIFs), locked-in retirement income funds (LRIFs), Canada Pension Plan (CPP) and Old Age Security (OAS) benefits, non-registered investment accounts, and maybe some extra cash from part-time or occasional work,” the article continues.

So, instead of your money coming from one source, you may be getting a stream of income from a variety of sources, the article notes.

“The more buckets you have, the more flexible you are in controlling your income levels … The key is figuring out which buckets to take money from and when,” Brianne Gardner, financial advisor and co-founder of Velocity Investment Partners at Raymond James Ltd. in Vancouver, tells the Globe.

She says Canadians “need to be more strategic in the decumulation stage of life to minimize their taxes not just from year to year but for the longer term, while also factoring in tax changes,” and to pay attention to tax policy changes, such as the recent federal government change to the capital gains inclusion rate.

You should start thinking about it five years ahead of actually retiring, she states in the article.

Owen Winkelmolen of PlanEasy.ca in London, Ont., sees three different stages for retirement tax planning – pre-65, 65 to 70, and 72 and older, the article notes.

In the pre-65 phase, retirees are usually receiving workplace pensions, money from RRSPs, or money from non-registered accounts, the Globe notes.

If you are drawing down money from registered and non-registered sources, there are different tax consequences. Registered money is taxed at a higher rate, but having less of it when you start getting Old Age Security (OAS) may give you a bigger OAS payment, the article explains. There’s also a pension income tax credit you may qualify for.

As well, many Canadians start getting CPP at age 60.

In the 65-70 phase, you start getting the federal age amount tax credit and can benefit from income splitting, the article notes.

It’s also possible to delay your CPP until you are older, to the maximum of age 70. The same is true of OAS, and if you start either later, you get a significantly larger monthly amount, the article explains.

Once you are 72 there is less wiggle room, the article notes.

“Not only are they already receiving CPP and OAS benefits, but the mandatory RRIF withdrawals increase each year. It can be a problem for retirees with large RRIFs who haven’t pre-planned withdrawals before this phase,” the article warns.

“Some retirees can get stuck with a lot of taxable income, a lot of tax owing and sometimes even OAS clawback if these accounts are quite sizable,” Winkelmolen tells the Globe. “You can get to the point at which you have a lot of income that you have little control over.”

In our opinion, if you haven’t called up a financial adviser or accountant in your working life, retirement might be a good time to turn to their expertise to help navigate this, especially the early phases of retirement.

If you’re a member of the Saskatchewan Pension Plan, or are considering becoming one, a great feature to be aware of is the plan’s portability. Since you can join as an individual, a change in jobs doesn’t impact your SPP membership – you can continue contributing as you move from one workplace to another.

Check out SPP today!

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Written by Martin Biefer

Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock, and playing guitar. Got a story idea? Let Martin know via LinkedIn.


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