My take on minimizing tax in retirement

My take on minimizing tax in retirement

“If you have a tax problem in retirement and that’s the only major problem you have, then with all due respect retirees you have it pretty damn good.  There are far worse problems to have than a tax problem in retirement.” – My Own Advisor.

Recently, I got a few reader questions citing this detailed article on the popular Retire Happy blog.  The article highlighted six (6) great strategies to minimize tax on your retirement income.  While there are many more strategies to employ I figured I’d offer my feedback on what I read in this article and provide an overview of how such strategies might (or might not) apply to us.

Strategy 1 – Plan to retire in a low tax bracket with the right mix of RRSP and TFSA.

You already know from reading my site the RRSP and TFSA are excellent accounts we use to defer and save on taxes respectively.

In our 40s now, I can’t tell you if we will “retire in a low tax bracket” or not.  I can tell you that’s not our plan.  I wrote as much in this how much is enough for retirement post.

While it may be ideal for some “…to have your taxable income below $46,000, regardless of how much cash you get…” we have determined a bit more is better.

Our goal is to own a $1 million portfolio (excluding workplace pensions, no government benefits included; assuming all debt is gone – own our home/condo) to start retirement with.  We will strive to maximize contributions to our RRSPs and TFSAs to get there and deal with the order of how to withdraw from those accounts, and other accounts, when we get there.  There is no desire to retire and receive the tax-free Guaranteed Income Supplement (GIS).

Strategy 2 – Plan to retire in a low tax bracket with tax-efficient investments

Now this is more like it.

The author is spot-on when writing about the dividend tax credit.  If you have non-registered investments, the type of investments you own in that account can help you minimize taxes.  Here is my article about the tax treatment of Canadian dividend paying stocks.

Furthermore, capital gains are only taxed at 50%.  This makes capital gains an efficient form of tax (far better than interest or employment income that is taxed at 100%).

As we get older, into our 50s, 60s and far beyond (good health willing) we intend to hold Canadian dividend paying stocks in our taxable account and slowly sell-off those stocks as we incur modest capital gains.

Strategy 3 – Plan to avoid the clawbacks

It only makes sense that GIS is clawed back at some point if your income is high enough AND for higher-income seniors, making close to $80,000 per year, Old Age Security (OAS) income starts to get clawed back for that program.

As controversial as this may sound, I’m surprised we haven’t overhauled OAS yet.  It is absolutely ridiculous that anyone making $100,000 in retirement still gets any sort of “security” income from general tax revenues – but they do!

Strategy 4 – Plan to use a Systematic Withdrawal Plan to get the lowest tax on your investment income

From the article:  “the lowest tax rate on investment income is on deferred capital gains at almost any income level.”  True, but some seniors may not be a position to always sell assets in retirement – they will need those assets to be generating income to cover expenses.

“To get cash flow from deferred capital gains, just sell some of your stocks, mutual funds or ETFs each month.”  Easier said than done especially if you are selling assets in a market that could be down 10% or 20% or more – just as some retirees that were forced to do during the 2008-2009 financial crisis.  Ask them how they liked that…

Unlike the author, I would assume all my “investments have doubled” (since I bought them) although I do expect our portfolio to grow considerably in the coming decade if let time in the market be my friend.

I’m assuming we’ll “live off dividends” to some degree, where my capital is churning out income at a fairly dependable rate.

I will also use a Variable Percentage Withdrawal approach at some point, something I eventually intend to write about on this site.

Strategy 5 – Plan to invest for dividends only if your income is $25,000-$46,000

From the article:  “Dividends from public Canadian companies actually have a negative tax rate if your taxable income is in this range. That’s right – negative tax.”  That’s great, but like I mentioned above, my plan is not to be the lowest tax bracket at time of retirement.

“…if your income will be at least $25,000 without the dividends, then you can take advantage of the negative tax” which is something my wife and I plan to do.

If things go well for my wife and I, we plan on living in the band highlighted below; reflecting our individual taxable income in retirement before pension splitting and other factors are involved.  For my province (Ontario) courtesy of TaxTips:

Strategy 6 – Plan to defer converting your RRSP to do the 8-Year GIS Strategy

Our plan is not to take GIS in retirement so I wouldn’t want to deploy this strategy.

A far better strategy would be:

  1. Have enough income as to avoid relying on GIS,
  2. Have enough income to potentially delay CPP and/or OAS to maximize those government benefits, while
  3. Having enough income to meet your expense needs.  Doing 1-2-3 would likely mean you can exhaust all your tax liabilities sitting inside your RRSP and RRIF assets before age 70 and rely on government benefits and other income streams after that age; helping ensure your money doesn’t outlive you.

Takeaways

Personal finance plans have been and will always remain – personal.  Our way of managing money will undoubtedly be different than yours.  What I can say with some confidence is by leveraging the properties of the RRSP and TFSA; maxing out contributions to those accounts, we’ll have options to consider.  When it comes to money management, options are good and I hope you consider yours.

What did you make of these six tax strategies?  What are your tax strategies as you enter retirement?  What strategies are you using now?   Thanks for being a fan. 

Mark Seed is the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've grown our portfolio to over $500,000 - but there's more work to do! Our next big goal is to own a $1 million investment portfolio for an early retirement. Subscribe and join the journey!

47 Responses to "My take on minimizing tax in retirement"

  1. “It is absolutely ridiculous that anyone making $100,000 in retirement still gets any sort of “security” income from general tax revenues – but they do!”

    Nobody likes to give what they were getting, but many of the complaints relate to the “Dividend Tax Credit” calculation where dividends are grossed up by 138% and this amount affects the clawback amount, not the actual dividends received amount.
    Say one receives $30k from cpp/oas. If dividends exceed $31.5k (or $43,170 grossed up), for total earnings of $61.5k, oas clawback on earnings above that begin.

    Reply
    1. Fair point about the dividend tax credit cannew but I’m thinking no senior couple on earth making >$160k combined per year in retirement needs any government financial assistance (re: OAS). Thoughts?

      Reply
  2. There are great strategies and we definitely plan to implement a combination of these. Having said that, I have no problem paying taxes to make sure we continue getting the great social benefits of being Canadians.

    Reply
  3. Lloyd (57, retired (but farm a bit), married, rural MB) · Edit

    I will not complain about paying taxes. The medical costs incurred over the 8.5 years of care my daughter used was considerable and I am grateful to my fellow citizens that paid taxes as well as created economic activity to generate revenue to fund our health care system. Paying taxes is but one obligation I feel honour bound to do.

    Reply
  4. RBull (58, retired, hitched, rural coastal NS) · Edit

    Some interesting strategies. We don’t really fit exactly into any of them but probably a mix of 2 & 4. The strategy will change somewhat as different government pensions come on and reliance on different accounts shifts.

    Cannew, are you talking about 30K CPP/OAS for a couple not “one”? MAX CPP & OAS is currently 13610.04 & 7183.08 = $20793.12
    My back up napkin calculations adds $39126.72 of actual eligible dividends before clawback starts @ total earnings of $74788. (20793 cpp/oas+53994 gross up divvy). And it would likley be a higher amount for dividends since most people have lower benefits coming from CPP. That seems a healthy amount for a single retired individual in this country.

    Dividend gross ups take into account corporates taxes already paid. I don’t see anything unfair about gross ups when considering it in totality – ie low income tax rates paid on eligible dividends offsets the gross up affect on OAS.

    Political statements…..I can’t see how Ontario keeps up their low tax rates in light of running enormous deficits! I’m guessing someone is going to get hammered sometime.

    OAS needs an overhaul along with other programs. Too many of them and some too generous and starts too early at 65 (OAS). Germany at 67, USA @ 70 for full SS. Just simplify and lower income taxes.

    Reply
    1. In today’s money, I think $60K before tax is more than enough for two in retirement for us. Throwing another $20-30K for travel/fun we would have a great retirement.

      Based on our needs of a modest lifestyle, we probably will never need to get to the thread of OAS claw back. But who knows, maybe miracle happened to our investment and we will be over that. I don’t worry about it, good problem to have. Also, who knows if OAS still exist or not when I retire.

      Reply
      1. RBull (58, retired, hitched, rural coastal NS) · Edit

        May, not sure if you realize but OAS clawback starts at $74K gross per person, so if a couple and income can be split equal = $150K and isn’t fully clawed back until approx 242K/ couple. (a lot)!

        Reply
          1. RBull (58, retired, hitched, rural coastal NS) · Edit

            Ha, lets not go that far. Live and learn. So far so good. I prefer to be a little more conservative with planning/spending.

            For the vast majority of Canadians OAS clawback isn’t an issue. Even if some or a lot is clawed back I would say that’s not a bad problem or position to be in. I agree with Mark that’s its overly generous but Cannew is right – its hard to take back something people have.

            Sounds like you’re doing fine with your plans. G/L

      2. We’re the same May.
        https://www.myownadvisor.ca/income-sources-needs-wants-retirement/

        A couple of years ago, with some modest buffers built in, I figure my wife and I could live off $4,000 or so per month excluding travel. Add in another $20k per year for that, a few months to travel to year, and that’s “enough” money in retirement.

        If our personal portfolio can spin off > $30k per year, then pensions x2 + CPP x2 + OAS x2 (and being debt-free) should be good for us. We haven’t reached out $30k per year in dividend income goal but about 55% of the way there.

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    2. *Sigh* – our Ontario government is a mess. Federally we’re not doing very well either.

      OAS absolutely needs to be overhauled as does the tax code overall.

      Reply
      1. RBull (58, retired, hitched, rural coastal NS) · Edit

        Many governments at different levels are a mess. We have our issues here too but maybe not quite as extreme…for now.

        Yes, tax code is ridiculously complex with decades of tinkering from every government, OAS blended into GIS and less generous at the top.

        Reply
        1. Lloyd (57, retired (but farm a bit), married, rural MB) · Edit

          I’m with both of you on this one. I don’t know why Mr Trudeau doesn’t call us up and get us to fix this item.

          OAS should begin clawback at around 55K or so and be completely clawed back at 80-90K. TFSA income should also count as income for OAS/GIS qualification and RRSP assets should also be taken into consideration when OAS/GIS is applied for. It is conceivable that a person/couple with a million (plus) dollar RRSP(s) and substantial TFSA assets could qualify for GIS. That’s just nuts.

          Reply
          1. It is possible with no other income, yes, you could have millions in the TFSA in another 30 years and still qualify for GIS. Nuts.

          2. RBull (58, retired, hitched, rural coastal NS) · Edit

            Right on. I agree with what you’ve written.

            Ha, Mr Trudeau doesn’t want to hear from me!!

            A more comprehensive look at all investable assets as well as income is needed when considering what people need for assistance and how much should be given. I would argue even home equity could/should be considered. There are plenty of very rich (real estate wise) but cash poor seniors out there. Should tax payers be paying for their daily expenses forever, while remaining in the same home, and then have their significant house value move tax free to the next generation?

          1. RBull (58, retired, hitched, rural coastal NS) · Edit

            Yes tax code is ridiculously complex. There are also many flaws, some of which we’ve pointed out above.

            My sister in law worked for Rev Can all her life, and an aquaintance of mine that we traveled with this winter was a CRA corporate auditor entire career. He spent much time simply reading and understanding the act itself.
            Some interesting stories from him.

  5. I called my Dad the other day and thanked him for getting off the boat in Halifax and not carrying on to Ellis Island. So glad we’re Canadian and have the social benefits that a free democratic liberal thinking state like Canada provides. We do love our social programs and it’s why people still flock here in droves.

    As far as strategies go, ya we’re all different. What’s important is to have one. All the best!

    Reply
  6. I have taken a look at the original article. I guess when planning for retirement, tax optimization is only one factor to consider, other things, like how much risk a retiree can tolerate, how much money is needed for a retiree’s desired lifestyle, etc. are equally important.

    SWP sounds a good strategy until you include risk of market volatility into consideration. Fees will be another big factor if selling your investment caused fees, especially if you are selling in small amounts. I will never do SWP myself as I do not want to sell at market bottom.

    Anything regarding to avoid GIS clawback is not relevant at all if you have contributed to RRSP every working year. It makes sense or not to exhaust RRSP before age 71 depends on the size of your RRSP and the year you retire. In the other hand, how to exhaust RRSP before age 71 might be used to dictate when to retire.

    It’s still good though to read this kind of articles to learn things that could be very useful. Personal finance is personal, no retirement plan fit all. But creativity for a retirement plan have to be based on knowledge. So learning more could mean a better plan.

    Reply
    1. RBull (58, retired, hitched, rural coastal NS) · Edit

      I agree May there are numerous considerations- fees, sequence of returns risk, asset allocation, taxes

      With SWP I’m thinking one can consider some of your assets will be fixed income if you are a balanced investor. (Mark writes as he invests – 100% equities.) If balanced you could withdraw FI and also likely rebalance assets by selling even more and buying equities.

      I prefer and use the VPW approach Mark refers to. We are staying below suggested amounts.
      http://www.finiki.org/wiki/Variable_percentage_withdrawal
      http://www.financialwisdomforum.org/forum/viewtopic.php?f=30&t=117200

      Our basic retirement cash flow strategy at this point age 58 is:

      1 workplace pension – for life, 60% for survivor
      unregistered dividend income – unwind sometime in 70’s
      minimum withdrawal from small/moderate LIF started in 2017 takes me to age 90 @ 3.5% nominal return
      RRSP withdrawals with amounts that take us to ~ age 80-85 (reducing when govt. pensions below start) and also are reinvested into TFSAs until age? @ 3.5% nominal return
      TFSAs utilize 80’s+
      OAS @65, CPP age TBD likely between 65-70

      On the RRSP calculator absolutely. Do homework on calculations yourself to make sure they work.

      Reply
      1. Wow, you have figured everything out!

        3.5% nominal return sounds quite low for predication purpose. So you are well covered.

        Our retirement plan will be simpler I guess. We will have only RRSP, TFSA, unregistered investment account, CPP and OAS to consider.

        Reply
        1. We’re not that different May. We’ll have RRSPs x2 + TFSAs x2 + 1 non-reg. account…but we’ll also have a small DB and DC pension plan. Add in CPP x2 and OAS x2 and that’s our retirement income stream. Between now and then – it’s full-time work until at least 50 and hopefully part-time work between 50-55.

          Reply
  7. Newly retired after 35 years of service. It has come as a shock to begin actually paying taxes in retirement. When I was working the government took more than enough off my pay to cover my taxes, now that I have retired I find myself searching for the 14-16 k that I have to come up with to pay my taxes. I now put $1,300 away monthly into EQ bank for my taxes. It seems like lots of people are making money off my invedtments, especially the government. At tax time as I plough through all the T forms, I wonder if it is all worth it. I am definitely drawing down my RRSP before I hit 65. I feel like getting out of the rat race of investing and just buying an annuity!

    Reply
    1. RBull (58, retired, hitched, rural coastal NS) · Edit

      James, welcome to retirement. Not sure if this applies to you however here goes.

      If after 2 years of owing more than $3500 at tax time, you’ll likely be asked to make tax installment payments. Maybe that would make sense for you anyway.

      Reply
    2. “…searching for the 14-16 k that I have to come up with to pay my taxes.”

      Well James, that’s a VERY good problem to have since if you’re paying that much in taxes you’ve got a great retirement nest egg/pension/other. Well done 🙂

      You seem smart to draw down your RRSP if you other significant assets before age 65. Kudos.

      Reply
    1. I want to retire where I can have time together with my family and friends, in the community where I could serve and be served, also get health care whenever I need it.

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    2. We’ve considered that Troy but I’m thinking we’ll simply rent short-term in various countries. No need to worry about foreign tax issues, reporting, etc.

      Reply
  8. Take it while you can get it is my outlook.
    I have paid taxes all my working life so I will not bite the hand that feeds me.
    No doubt that one government or another will look at all the tax free monies in the TFSA’s in several years from now and the drool will appear on their lips. They will find a way to tax those TFSA’s one way or another.
    I have nothing against paying taxes. It is just the mis-management of our hard earned tax dollars that leads me to adjust my income in any way I can to legally pay as little tax as possible. I can only hope that JT’s India costumes were at his own expense and not on our dime but
    then it was an official visit wasn’t it!
    As to OAS, if you paid in to it (taxes) you are entitled to it. If you are making more than a comfortable income in retirement then that can be clawed back. Maybe the clawback can be adjusted in some way but again, the higher earners did, in theory, pay more taxes than the medium income earners.
    Taxing the rich to pay the poor sounds nice. It reminds me of the old grasshopper and ant tale though.

    RICARDO

    Reply
    1. I am not against taxes it all. Canada is a great country as it takes care of its seniors, juniors and sick people. I don’t need to worry that a serious illness will bankrupt me as my friends do in South. Especially being a mom, although I never got any milk cash from the government, I am all for the government to support poorer family to raise kids. After all, in a country full of seniors like Canada, we need babies, and anybody who wants to raise kids is doing a great favor to the entire society and well deserves help from the entire society.

      But I do have doubt if the tax system is fair or not. Is it true we are taxing the rich to pay the poor? My doubt is that we are taxing middle class working people to pay both rich and poor. As I know, middle class family with two hard working people like mine pays lots of tax while real rich people have thousands of ways to avoid paying tax. Did Buffet once said his tax rate is much lower than his secretary?

      Reply
    2. “I have nothing against paying taxes. It is just the mis-management of our hard earned tax dollars that leads me to adjust my income in any way I can to legally pay as little tax as possible.”

      I am striving to do the same Ricardo….that annoys me as well – the sheer waste of money.

      Reply
      1. I am wondering if we (all Canadians) paid for JT’s various outfits over in India.
        If so I want to see a tailor to get a new suit as well

        Reply

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