Layer your retirement income to minimize your tax bill

RRSPs aren't the only financial vehicle that help you manage your taxes over time

Having multiple retirement income sources is a great idea. And that diversity, with proper planning, can reduce the income tax you pay.

Most of us understand the basic retirement savings methods: a registered retirement savings plan (RRSP) or a spousal RRSP. We save a little bit of money when we can and reduce the income taxes we pay in the year we claim the RRSP deduction.

Then when we retire – and plan on being in a lower tax bracket – we take the money out in small amounts each year.

However, there can be a couple of issues with that type of thinking. And RRSPs and spousal RRSPs are just part of retirement planning.

What happens if you’re not in a lower income tax bracket when you retire? What if your income tax rates rise? Will you pay more tax in retirement than you saved while making your RRSP contributions? In some cases, this is highly likely.

But that doesn’t necessarily mean you should forgo your RRSP contributions.

There are three tax-saving parts to an RRSP:

  • The first is the tax deduction you get when you make the contribution, reducing the cost of your savings and providing some instant gratification.
  • The second is the tax-deferred growth you get annually as the money compounds tax-deferred inside your RRSP.
  • The third is the ability to control your withdrawals, although this is constricted somewhat once you convert to a retirement income fund (RIF) through minimum withdrawal limits that increase as we age.

Minimum RIF withdrawals aren’t necessarily a bad thing. But taking the annual minimum could increase the total income tax you pay in your lifetime. As well, doing so could increase the ‘success tax’ that your estate might eventually have to pay.

The ability to control your excess withdrawals allows you to tax plan, based on other sources of income you have each year. For example, in a year in which you do some tax-loss selling from a non-registered account, you could increase your RRSP/RIF withdrawal.

So when planning for tax-effective retirement income, look beyond just RRSPs.

A tax-free savings account (TFSA) can be a great tool. While many investors use their TFSA accounts as short-term savings, they can also be used for long-term savings. In addition, the fund compounds over time, so the withdrawals can really enhance your retirement income without being taxable.

If you use TFSAs to fund a long-term goal like retirement, make sure you focus on long-term investments. Nothing says you have to limit your fund to short-term interest-bearing investments. A TFSA can hold long-term investments such as stocks, bonds, exchange-traded funds and mutual funds. Your investments should reflect your goals for the money inside the TFSA.

Remember too that you can take money out of your RRSP or RIF and put it into your TFSA if your income will be lower in the current year than it was in the preceding year.

You can also have a non-registered taxable long-term savings account. Investments inside this account should focus on assets that provide long-term tax-advantaged capital gains and dividends. This will reduce your annual tax bill and allow for some tax-free or tax-advantaged income in retirement.

Having multiple retirement account types to draw income from allows you to tax plan annually. By layering different types of income, you can reduce your overall taxation in retirement.

Troy Media columnist Bill Green is an hourly financial and estate planner, public speaker and author of The Success Tax Shuffle. Bill has over 26 years of experience in the financial services industry. If you would like Bill to answer your financial questions, contact yourmoney@troymedia.com.


retirement income, tax bill, rrsp, tfsa

The views, opinions and positions expressed by columnists and contributors are the author’s alone. They do not inherently or expressly reflect the views, opinions and/or positions of our publication.

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