Tips To Minimize Tax on Your Retirement Income

June 21, 2018

Minimize-Tax-on-Your-Retirement-Income

There are plenty of opportunities to optimize your wealth before or after you retire. If you are a salaried employee, it is likely that you have limited tax saving strategies and tax deductions. Financial matters might change radically when you retire. However, effective tax planning can really help you minimize your tax liability. You can have the freedom to decide the amount of income that will be taxed once you retire, how much you want to withdraw from your investment, and how tax-efficient your assets are going to be.

Many Canadians don’t take retirement planning seriously until later in life. It is important for you to start early with financial planning; many years in advance before you retire. The following are some valuable financial planning tips that will help you minimize your tax in retirement:

Retire in a low tax bracket

The taxable income is not the same thing as the cash you receive. You need cash flow rather than income which is taxable – cash flow may not be taxable. The right mix of tax-free, low-tax, and fully taxable income will help you have a lower taxable income. Pensions, RRIF withdrawals, and interest are taxed. On the other hand, tax-efficient, non-registered investments and some TFSA withdrawals are partially taxed.

It is probably a good idea to have your taxable income below $45,000, no matter how much cash you receive. If you are a single person, have your taxable income under $25,000. If so, you can have the opportunity to get the tax-free Guaranteed Income Supplement (GIS). If you get $250,000 in your TFSA and $750,000 in your RRSP, you can withdraw $10,000 from your TFSA and $30,000 from your RRSP all tax-free.

Avoid the claw backs

Did you know the highest taxed Canadians are seniors with incomes under $25,000? Apart from paying in income tax, they get $.50 of their GIS clawed back for every dollar of taxable income. Old Age Security, for higher-income seniors, is clawed back at 15% of their income ($75,000-$121,000). Lower taxable income with the right TFSA/RRSP mix and tax-efficient investments can save more in taxes if your income is in the right range. In order to avoid clawbacks, it might be appropriate to cash in your RRSPs before you turn 65.

Do not invest for dividends if income below $25,000

If your taxable income is or somewhere between $25,000 and $45,000, dividends from public Canadian companies have a negative tax rate. If your taxable income is below $25,000, the dividends are likely to be taxed at 62%. Therefore, you need to be extra careful when considering dividends as an investment opportunity. There are a number of other tax-saving strategies that you can use to optimize your wealth. Your objective should be to get the cash flow you need to support your retirement lifestyle while paying the minimum in taxes. A financial planner can help you decide your own taxable income. So plan early to be in low tax brackets, avoid clawbacks, and try to qualify for GIS.

Consult Kewcorp Financial if you are in Edmonton, Alberta

Kewcorp Financial is where we help individuals and businesses analyze their financial situations from a tax perspective to ensure tax efficiency. If you are in Edmonton and need professional tax planning advice, give us a quick call and we will be happy to help you deal with financial challenges and complexities.