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Q: I am looking for advice on tax planning and balancing out my future income needs. I am a single woman, retiring this year at the age of 65 and wonder if I can get help from a tax-planning perspective and how to retire with a focus.
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We asked Jason Heath, CFP, managing director at Objective Financial Partners Inc., to answer this one.
One of the biggest tax changes from preretirement to postretirement is withholding tax, according to Mr. Heath.
“An employee has tax withheld on their paycheque at source by their employer and, with tax deductions and tax credits on their tax return, will typically get a small refund,” he said. “Most income sources have little to no tax withheld in retirement and this can lead to tax surprises for retirees.”
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If your investments are primarily or exclusively in a Registered Retirement Savings Plan, you can take an RRSP withdrawal, but most people convert their RRSP to a RRIF – a Registered Retirement Income Fund, he said.
There are rules, he added, to follow when activating the RRIF. Minimum annual withdrawals are required that range from 4 per cent at 65 to 5 per cent at 70 – it rises each year as you age. The minimum withdrawal from your RRIF has no required tax withholding, though the withdrawal is fully taxable income. And that means you can expect a balance owing when you file your tax return.
Furthermore, Canada Pension Plan and Old Age Security government pensions do not have withholding tax either – unless you ask Service Canada to withhold tax for you. “So, the three primary sources of income for most retirees have no tax withheld but are all taxable income that cause tax on April 30,” he said.
“A single woman in good health with no pension should strongly consider deferring her CPP and possibly OAS benefits to age 70,” Mr. Heath advised. “Each month you delay the start of your pension benefits, the monthly payment you can receive grows. If you live well into your 80s or beyond, you may have more lifetime retirement income if you defer.”
And, he noted that if you do delay one or both pensions, you may need or want to take larger RRSP or RRIF withdrawals between age 65 and 70, lowering your withdrawals after 70 instead. This can be particularly helpful for retirees with no workplace defined benefit pension plan.
“Retirement income planning can be a lot trickier than building your savings during your working years, so make sure you take the time to learn about it on your own or seek advice from a professional,” Mr. Heath said. “Pension timing, tax planning and investment strategy can help boost your retirement spending and estate value.”
Do you want advice on a financial planning or retirement issue that’s affecting you? Send us an e-mail.
