3 Tips to Maximize Your Income and Retire More Comfortably
Are you planning your retirement and looking for the best way to fund this stage of your life? You’ll be happy to learn that there are fiscal and administrative strategies you can use to maximize your income at retirement without affecting your quality of life.
1- Planning your RRSP withdrawals
The Registered Retirement Savings Fund (RRSP) is one of the best fiscal vehicles available. As a result, it’s in your best interest to let those investments grow and leave them untouched and sheltered from taxation for as long as possible. This should be the last source of income you withdraw from, only after your TSFA and taxable investments are gone. The only condition is that the law requires you to convert your RRSP into a Registered Retirement Income Fund (RRIF) by the time you turn 71, and start withdrawing funds by the following year.
Withdrawals from an RRIF are included in the calculation of your taxable income. “Large withdrawals can considerably impact the amount of tax you’ll pay, as well as your access to certain social benefits,” warns David Truong, an advisor with the National Bank Private Banking 1859 Experts Center.
To avoid this, you need to set up an income-splitting strategy or progressive withdrawals from your RRIF to minimize the impact on the income you declare.” For example, if you are a single person who is eligible for the Guaranteed Income Supplement (GIS), it’s definitely in your best interest to avoid making large withdrawals from your RRIF that would increase your annual income above $17,000, which could cause you to lose this benefit.
By optimally planning their RRSP/RRIF withdrawals, a person might even be able to retire at an earlier age.
2- Splitting income between spouses
Being in a relationship allows you to declare some of your retirement income under your partner’s name to optimize your tax bill. Because tax rates are progressive, this strategy is more lucrative when there’s a significant income gap between both partners. The idea would be to get as close as possible to a 50/50 ratio, splitting your income equally between both partners.
You can split your taxable income through a Registered Pension Plan (RPP), Registered Retirement Income Fund (RRIF) or Life Income Fund (LIF), up to a maximum of 50%. This can be done annually on your tax return.
In cases where dividing your income at 50% isn’t enough to allow you to achieve tax balance, you can plan ahead and make an RRSP contribution to the spousal RRSP, which would be 100% taxable on the withdrawals made by the spouse. To avoid attribution rules, the contribution needs to be in the spousal RRSP for at least three years, except when you need to make mandatory withdrawals at 72.
If you live in Quebec, the income from the Quebec Pension Plan (QPP) can also be divided between eligible spouses, for the number of years you are living together as common-law and up to a maximum of 50%. In this case, it’s a clear split: the amount is not just declared under the spouse’s name, but is actually deposited into their account. This procedure needs to be requested from a QPP administrator and the income will be adjusted between partners according to their situation.
3- Delay your government pension to get the most out of it
Pushing back your government retirement pensions, Old Age Security (OAS) and Canada Pension Plan (CPP) allows you to maximize them. Theoretically paid out to retirees as of age 60, these pensions increase by 36% for the OAS and 42% for the QPP if you wait until you’re 70, the maximum allowable age, to claim them.
This tip requires the retiree to reach into their savings to bridge the gap, but ultimately provides them with a higher income, especially if they don’t have a defined benefit RPP. “If you have enough money set aside, it makes sense to wait five years to receive more in the end,” says David Truong. “But if you need money, it’s better to ask for these benefits as early as possible.”
Whether you’re preparing for retirement or you’re already there, there are lots of tricks to allow you to optimize your financial plan. Don’t hesitate to speak to your financial planner about it. They’ll be able to guide you through the steps you’ll need to take and fill you in on any options you might have missed.
Edited on 31 October 2018