Tax-efficient retirement withdrawal strategies
May 2022 – 15 min read
There are ways you can manage the amount of income tax you pay in retirement
Withdrawing from various types of retirement accounts in the right order can make a difference
Pension income splitting can help you pay less tax
TFSAs are a tax-efficient place to keep money in retirement
How do you pay less tax on retirement income?
You’ve worked hard to save for your retirement. The last thing you want to do is pay more tax than necessary as you turn those savings into retirement income.
Minimizing the income tax you pay is one way to help your savings go further. Here are a couple of strategies to consider to help manage your annual tax payable in retirement.
Maximize your tax bracket
It’s important to understand the tax bracket you’ll likely fall into based on the income you get from all sources, including old age security (OAS), Canada/Quebec pension plan (CPP/QPP), annuities, employment, registered pension plan (RPP) and registered retirement income fund (RRIF) minimum payment amounts.
|Tax bracket|| |
|Illustration of combined federal and provincial tax|
$50,197 up to $100,392
$100,392 up to $155,625
|4||$155,625 up to $221,708||39%|
The above example is for illustrative purposes only, and does not reflect actual tax rates. Situations will vary according to your province/territory and specific circumstances.
If you need more cash flow and you’re close to the top of a tax bracket, use sources where the withdrawals aren’t taxed like a tax-free savings account (TFSA) to avoid moving up to a higher bracket and paying taxes at a higher rate. You may also consider accessing non-registered assets. Note: selling some non-registered investments may generate a capital gain or loss you’ll need to report on your tax return.
However, if you’re in the middle or lower end of a tax bracket and need more money, consider taking it from taxable sources such as RRIFs and life income funds (LIFs).
Generally, especially in lower tax brackets, if you’re going to pay tax at a particular rate, you may as well max out that tax bracket and pay tax at that rate each year. The alternative is possibly sliding into a higher tax bracket some years and potentially paying more tax.
However, watch out for a potential clawback of government benefits if your retirement income is above a certain amount.
If you don’t need to use all the income you take in the “max-out” years, you can provide yourself with more flexibility later by putting the extra money into your TFSA or non-registered assets. This way, in the future, you’ll be able to withdraw money from those accounts without paying tax and potentially reduce future net income.
Pension income splitting
This strategy helps reduce taxes by transferring pension income (for tax purposes) from the higher income earner to the lower income earner. The transferring spouse or common-law partner can give up to 50% of their eligible pension income to the receiving spouse or common-law partner.
If you, as the transferring spouse, are age 65 or older, eligible pension income splitting sources include:
- Annuity purchased with a registered retirement savings plan (RRSP)
If you’re under age 65, eligible income is mainly limited to:
- RPP benefits
- Certain payments resulting from the death of a spouse or common-law partner
Note: Quebec residents under age 65 can’t split pension income for provincial income taxes.
TFSAs during retirement
Because any money earned inside a TFSA isn’t taxable, even when you withdraw it, you may be better to hold retirement assets in a TFSA (up to the contribution limits) rather than a non-registered account.
TFSAs are great place to “park” money in retirement including RRIF money you’ve been required to withdraw but don’t have a use for, or emergency fund for unexpected expenses.
You can also give your spouse money to deposit in their TFSA, which is a way to split income for TFSA contribution amounts.
Now that you know more about budgeting in retirement, you may want to contact your advisor to:
Calculate your total retirement savings
Learn about options for drawing an income from your savings that may help you have enough money to last through your entire retirement
The information provided is based on current tax legislation and interpretations for Canadian residents and is accurate to the best of our knowledge as of the date of publication. Future changes to tax legislation and interpretations may affect this information. This information is general in nature, and is not intended to be legal or tax advice. For specific situations, you should consult the appropriate legal, accounting or tax advisor.