As you near retirement or are in retirement here are a number of useful strategies to help guide you along the way.
1. Will your savings last through retirement?
For investors entering retirement, high portfolio returns are important, but they are only one factor influencing how long their savings will last. Another factor is the order or sequence of returns. There is a simple mathematical reason for this: regular withdrawals progressively diminish a portfolio’s dollar value and that dollar value is the base on which future returns compound.
When negative returns occur near the outset, the investor is left with a smaller base on which future positive returns can compound. Over time that base continues to decline with each additional income withdrawal. This could result in retirement savings running out much sooner than if the portfolio experienced positive returns at the start of the withdrawal period.
2. Should you make one last RRSP contribution before converting to RRIF?
If you are 71 years of age and have RRSP contribution room, consider making one final RRSP contribution – particularly if you expect to be in a lower tax bracket in future years. RRSP contributions are generally not permitted for RRSP account holders who are older than 71, so this may be your last opportunity for a large tax deduction in one year. If you’re younger than 71, you can continue to contribute to your RRSP until the end of the year you reach age 71. The earlier contributions are made, the longer RRSP assets can grow tax-deferred.
If you are older than 71, have unused RRSP contribution room and have a spouse or common-law partner who is 71 years of age or younger, consider contributing to a spousal RRSP. Contributions to a spousal RRSP will create a tax deduction on your tax return. As long as withdrawals occur three years after your contribution is made, you can reduce your household tax bill through this income-splitting vehicle.
3. Should you name a beneficiary on their RRIF application?
Beneficiaries named on RRSP applications do not automatically carry over to RRIFs. If you’d like to transfer your RRIF assets to beneficiaries directly without flowing through your estate, be sure to name your beneficiaries on your new RRIF application*. Failure to do so may result in complex estate settlement matters or unintended distributions.
Estate administration fees may also apply. Where a spouse or common-law partner (CLP) will inherit your RRIF, you have the option to name your spouse or CLP “successor annuitant” or “beneficiary”. The successor annuitant designation allows your spouse or CLP to receive your RRIF based on the plan’s original terms and conditions.
For example, if your RRIF minimum payments were calculated based on your age, the payments will continue based on your age when received by your spouse or CLP. Alternatively, the beneficiary designation generally requires your spouse or CLP to set up a new RRIF based on new terms and conditions. If your spouse or CLP is older, this can lead to higher minimum payments and less tax-sheltering.
4. Whose age should you use to calculate RRIF minimums?
When setting up a RRIF, you have the option to calculate payments based on your own age or the age of your spouse or common-law partner. If your goal is to maximize the tax-deferral opportunity of a RRIF, it is generally best to calculate your annual RRIF payments based on the younger person’s age. This results in smaller mandatory withdrawals and allows for a longer period of tax-deferral.
If you don’t require the cash received from mandatory RRIF payments, consider reinvesting the proceeds in a Tax-Free Savings Account (TFSA) or non-registered investment account. Subject to available TFSA contribution room, TFSA contributions allow for tax-free growth. Non-registered investment accounts have the potential for dividend income and capital gains, both of which are tax-efficient.
5. Have you considered requesting increased withholding tax on RRIF payments?
Withdrawals from RRIFs are generally subject to a withholding tax of between 0 and 31% depending on the amount redeemed. If you regularly receive other forms of taxable income that are not subject to withholding tax at source (for example, capital gains from the sale of investments, interest or dividend payments), you may wish to increase the withholding tax taken from your RRIF payments. By doing so, you can offset taxes payable on your other income sources and reduce the balance owing when you file your income tax return at year end. Contact your RRIF carrier to determine how to request increased withholdings, if desired.
6. Are you entitled to the pension credit for RRIF income?
If you are 65 or older and receiving (or about to receive) RRIF income, consider claiming the pension credit on your federal tax return for up to $2,000 of RRIF income. A similar credit is also available provincially, although there are some differences across the provinces. The federal credit is worth $300, and can be used to offset tax payable on any form of income. The credit cannot be carried forward to a future year, so be sure to claim the credit when available. If you are under the age of 65, the pension credit is available for your RRIF income only if received as a consequence of the death of a spouse or common-law partner (CLP).
If you are eligible to claim the pension credit for RRIF income, consider splitting the income with your spouse or CLP. Since 2007, income eligible for the pension credit is also eligible for pension income splitting. If your spouse or CLP is in a lower tax bracket, an effective income-split will be achieved. Also, by transferring the RRIF income to your spouse or CLP (which is achieved simply by noting the split on your respective tax returns), you may be able to double the pension credit for your family, provided your spouse or CLP is 65 or older.
7. Do you own a business. What should they know about planning for retirement?
Traditionally, owners of incorporated businesses have been advised to pay enough salary each year to maximize RRSP contributions. Historically, this strategy has been viewed as the best opportunity to maximize retirement savings. However, with decreasing corporate tax rates, changes to the taxation of dividends and the advancement of tax-efficient investment vehicles, many business owners are rethinking their retirement savings strategies with a view toward corporate investing.
8. What are the rules around pension income splitting?
Individuals who are 65 years of age or older can allocate for tax purposes up to a maximum of 50% of their eligible pension income received from a lifetime annuity (purchased with registered, non-registered, superannuation pension, registered pension plan, or deferred profit sharing plan funds), registered pension plan, registered retirement income fund, life income fund or deferred profit sharing plan income. The individual continues to receive the entire amount of income but can allocate up to 50% of the amount to a spouse or common-law partner, who will include this amount on his or her annual tax return. The receiving spouse or common-law partner is not required to be 65 years of age or older to receive an allocation, and the amount allocated can be changed each year for the benefit of the couple.
For individuals not resident in Quebec and under 65, eligible pension income can include a registered pension plan. Income from a deferred profit sharing plan or annuity (registered and non-registered) received as a result of the death of a spouse are also sources of eligible pension income. Individuals can also allocate up to 50% of annual income received from these sources to a spouse. RRIF or LIF income however cannot be split while the annuitant is under age 65, unless the individual is receiving the RRIF or LIF income due to the death of his or her spouse or common-law partner.
9. How do low interest rates affect retirement income?
In the past, investors used to shift their allocation towards investment-grade bonds as they aged. However, government bond yields have been declined to very low levels, making risk-free income generation more difficult. Yields on GICs and government bonds in many cases aren’t even sufficient to offset inflation – creating an automatic loss of purchasing power that grows with each passing year. The price of safety has become very high, creating a widening income gap for many retirees.
10. Can you transfer a retirement plan from the US to Canada before converting to a RRIF?
Canadian resident investors who were previously residents of the U.S. may want to transfer benefits from their existing retirement plan to a Canadian Registered Retirement Savings Plan (RRSP). In most cases this can be accomplished on a tax-deferred basis. Under the right conditions this can simplify retirement planning and reduce or eliminate the need for duplicate tax reporting.