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Q: I am retiring later this year after I turn 67. I have about $750,000 in my RRSP, and I qualify for CPP and possibly OAS. My spouse is still employed, earning approximately $45,000 and plans to work until June, 2030. Are there any tax reduction strategies that I can apply going forward, and can I apply them to both of us? I’m particularly interested in whether I should hang on until 70 to take CPP.
We asked Jamie Golombek, CFP, managing director, CIBC Private Wealth, Toronto, to answer this one.
Let’s start with your Canada Pension Plan question. Your CPP retirement pension is based on the amount you contributed to CPP, the number of years you contributed, and the age you choose to start receiving your CPP retirement pension, said Mr. Golombek. Depending on all of that, the maximum CPP retirement pension a person could receive starting at the age of 65 is currently $1,507.65 monthly.
The longer you can delay, the better, he added. Here’s how it currently works: The amount you receive will be permanently increased by 0.7 per cent for each month following your 65th birthday until the date when you start receiving payments (up to age 70), so you’re already ahead of the game. Once started, your pension is indexed to inflation annually and is payable for life.
Should we help our son buy a home even though we’re on the verge of retirement?
“When considering when to start receiving CPP, you should compare the amounts you would receive if you start earlier or later, as well as any enhancement that may be available with continued CPP contributions,” said Mr. Golombek.
You should also think about your anticipated income needs. Taking your CPP can depend on factors such as whether you need more income now to meet your living expenses, or if you can wait and collect it later. “Also, consider your life expectancy based on your current health and family history. A longer life expectancy may support delaying the CPP retirement pension as late as age 70,” he said.
The CPP retirement pension is included in income and taxed at graduated, marginal rates, which increase with your income. “In years when your other income is low, that could mean lower tax on your CPP. That being said, delaying your CPP retirement pension so that you receive higher amounts could increase your overall income,” he said. This, however, may also result in a reduction of other income-tested government benefits, such as the Guaranteed Income Supplement (GIS), the Old Age Security (OAS) pension and the Canada Grocery and Essentials Benefit (formerly the GST/HST credit).
As for retirement tax planning, Mr. Golombek suggested pension splitting, a popular strategy that may be helpful to you. Pension splitting is done by making an election on both your and your spouse’s tax returns. You can elect to split up to half of your pension income for tax purposes by allocating an amount to your spouse. Potential benefits of income-splitting may include doubling the pension income credit and avoiding, or even entirely eliminating, the OAS clawback.
“Any pension income that qualifies for the $2,000 federal pension income credit also qualifies to be split. Specifically, this would include annuity-type payments from a pension plan (regardless of age) and can also include Registered Retirement Income Fund (RRIF) or Life Income Fund (LIF) withdrawals once you reach 65. OAS pension can’t be split, but CPP benefits can be shared with your spouse.” Another tip: make sure you inform Service Canada.
Do you want advice on a financial planning or retirement issue that’s affecting you? Send us an e-mail.
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