Life expectancies have steadily increased over the past few decades, such that individuals at age 65 are often very healthy and vibrant and still able to make significantly increased in a retirement income. Many of the individuals have no clear understanding of when they can realistically retire or how much money they need to save to reach their retirement objectives. The important factors to think beforehand are like it’s going to be early retirement with less retirement income or their delay retirement so that they can increase the standard of their retirement lifestyle? Are they willing to make a trade-off between maintaining their current lifestyle and working to achieve their retirement objectives? In those prime working years, maxing out yearly contributions to registered retirement savings plans (RRSPs) reduces your taxable income and likely results in a tax break.
Spousal RRSPs: Probably the best way to equalize a couple’s retirement income and achieve these tax savings is by contributing to spousal RRSPs during their work career. To clarify, a spousal RRSP in an RRSP to which one spouse contributes and the other spouse is the annuitant and therefore the legal owner. The contributing spouse can be any age or the annuitant spouse must be turning age 69 or less in the year of contribution.
Tax-preferred investment income: The preferential tax treatment of Canadian dividends, capital gains and return of capital are lost when earned and withdrawn from an RRSP/RRIF. Both long-term capital gains and a sum of money paid regularly investment income, are a source of profit of a corporation to the stockholders and hold potential tax consequences. An investor does not have a capital gain until an investment is sold for a profit. The tax rates differ for capital gains and differ for dividends based on they are ordinary or qualified, or whether the asset was held for the short term or long term before being sold. So for assets in a corporate investment account, consider holding part of the equity allocation in the corporation from a tax minimization standpoint.
CPP/QPP sharing: To reduce the family tax burden, a couple can share up to 50% of each of their CPP/QPP retirement benefit with the other spouse. The amount of the benefit that can be shared depends on the number of years that they have been spouses and contribution would be a tax benefit of this sharing strategy if the higher-income spouse in retirement also has a higher CPP/QPP retirement benefit. Furthermore, CPP/QPP sharing is only available when the younger spouse is eligible to collect CPP/QPP at least at the age of 60 and substantially retired.
Prescribed rate loan: One of the most common income-splitting strategies for couples of any age is the prescribed rate loan strategy involves, a high-income spouse lending money to a low-income spouse at the CRA prescribed interest rate. Couples can also employ this strategy in retirement if the high-income spouse owns most of the non-registered assets.
Effective use of surplus assets: While planning for retirement, we should determine we have adequate income and assets to meet the retirement needs. If the financial plan to have surplus non-registered assets to purchase a tax-exempt life insurance policy and/or gift some of the surplus assets to low-income family members. Lifetime gifts have surplus assets that will not need during retirement and will be providing funds to your low-income children in the future to buy a home, subsidize education costs, start a business or pay for their wedding. There will be no attribution on any investment income earned on the gifted funds if the child is age 18 or older.
Prescribed life annuity: If you are at least age 60, a conservative investor and not satisfied with your cash flow from traditional non-registered fixed-income assets, consider using some of these fixed-income assets to purchase a prescribed life annuity. Annuities are provided by insurance companies, creating a pension-like regular income in retirement. The amount of money will be received based on the age at the time of purchase, the size of the premium, health status, interest rates, and any additional features that the contributions are made either monthly, quarterly, semi-annually or annually. The prescribed annuity will provide you a lifetime of tax-effective retirement income. If you are concerned that with an annuity there will be no funds payable to your beneficiaries upon death then consider purchasing an insured annuity.
Leveraged RRSP/RRIF withdrawal: The interest paid on the investment loan is tax-deductible, which helps to offset some of the incremental tax resulting from the RRSP/RRIF income. In essence, this strategy converts a fully taxable RRSP/RRIF account into a tax-preferred non-registered account and can potentially result in a greater after-tax income and assets during retirement. Carrying debt in retirement, tax-deductible debt is usually only suitable for those individuals that have the surplus cash flow to pay the interest costs, higher risk tolerance and at least a ten-year investment time horizon.
Minimum RRIF withdrawal planning: If you have an adequate pension and non-registered assets to meet most of your retirement expenses then you will likely only need to withdraw the mandatory minimum amount from their RRIF, LIF or PRIF each year. The minimum RRIF withdrawal on the younger spouse to minimize the amount of the annual withdrawal, thereby keeping more assets in the RRIF to grow tax-deferred. There are not a one size fits account for extra money and to have tax-efficient in retirement as possible but typically an RRSP will be good to draw at first, while others should leave their RRSPs till last.
Tax bracket management: Everyone need to be aware of the taxable income thresholds, and one can do this in a better way by income splitting strategies could be employed to stay below one of the above thresholds. If the tax bracket is 25% than the capital gains tax rate is only 15% and if the tax bracket is 15% than the capital gains tax rate is only 0%. Interest, foreign income, eligible Canadian dividends, and capital gains are all taxed differently, and return of capital is tax-free.