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.
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:
- Have enough income as to avoid relying on GIS,
- Have enough income to potentially delay CPP and/or OAS to maximize those government benefits, while
- 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.
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.