We all want to save on taxes. That can feel even more important in retirement. Having spent so many years building your wealth, you hope to keep as much as you can. Nicole Ewing, Director, Tax and Estate Planning, TD Wealth, joins Kim Parlee to share five ideas that could help you pay less tax in retirement.
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* When you retire, maximizing your savings means everything. You have spent so many years building your wealth. You want to keep as much as you can. Nicole Ewing, Director of Tax and Estate Planning at TD Wealth joins me now with five ideas that could help lower your tax bill in retirement. Everybody just turned up the volume, Nicole, because they want to hear this one.
- So, let's start. The first thing you say, though, to think about is, even before you actually retire, making use of spousal RRSPs is a good thing to think about.
* It is. It's something to consider and make sure that you're determining whether it's an effective strategy for you. So when we think about spousal RRSPs, what we're doing is having the higher income-earning spouse essentially income-split with the lower income-earning spouse and is giving them a contribution to their RRSP to help grow their retirement savings. This allows the contributing spouse, the higher income spouse, to use that deduction for the contribution against their own income.
- And then, in retirement, this has equalized the income streams a little bit between the higher and lower income-earning spouse so that we have income going into the hands of each of them and taxed at their marginal rate. So rather than having all of that income flowing out to the higher income-earning spouse in retirement, we're able to reduce their overall tax bill, put some of that income into the hands of the lower income-earning spouse, and have it taxed at their lower marginal rate. So overall, we have a lower family unit tax bill in retirement.
* Great idea. Number two is planning the order in which you draw from your income sources in retirement. This is the decumulation people like talking about. But it matters in which the order it happens. So take us through what is optimal.
* It does. And what's optimal will depend on what your goals are, what your personal circumstances are. So, just, there's no one size fits all for the optimal decumulation strategy. But there are some things you want to think about. So if you want to minimize risk, for example, you're going to want to draw down on your more volatile, aggressive investments first. If you are wanting to reduce the current tax that you're receiving in retirement, maybe you're thinking about pulling out of your TFSA, which you can receive tax-free.
- If you're wanting to reduce future tax, it would be a different strategy. If we're looking at growing our investments as much as we can, even though we're in retirement, we still want to see that growth, then we are wanting to think about keeping our investments in their registered form as long as possible and maybe accelerating our Canada Pension Plan and OAS, taking that earlier rather than later. If we're thinking about our estate value and how to maximize that, perhaps we're thinking about drawing down on our registered accounts first, which are fully taxable at death.
- So if you were to pass away having balance in your RRSP or your RRIF, that's going to be fully included in your income at your death and taxed at, presumably, the high rate. So it really does depend on what your overall goals are, what your assets and other investments are, depending on your cash flow and liabilities, whether or not you are taking from your registered plans first, and which ones, or whether you're claiming your CPP earlier or later really will depend on your personal circumstances.
* I love that. I love the fact that you always ask, what are we optimizing for? That's always the first question. So, OK, number three, I like this one. You say, make effective use of your surplus assets. I just want to start by saying, I hope everyone is blessed with surplus assets. What do you qualify as surplus assets?
* Well, exactly. Surplus means beyond what you need to fund your lifestyle in retirement. And that's factoring in everything. So, of course, put your own mask on first. Make sure that you have the investments and the cash flow that you need to fund your retirement. But to the extent you do have surplus assets, depending on what their form are and what your goals are, there might be some things you can do.
- So if we're thinking about, if you have income-producing assets, for example, maybe we want to accelerate the inheritance and be giving some of that to the next generation now as opposed to continuing to have those income-producing assets included in your income and taxed at your high rate. Maybe you're looking at a philanthropic strategy, where we're doing an overall plan that includes your charitable intentions and maximizing options like securities that have gains, being able to make those gifts in kind to a charity, and wiping out the capital gain entirely, which is very effective. Maybe you're thinking about utilizing a private giving foundation that allows you to really have a planned giving strategy to reduce your taxes yearly, but also in your estate.
- We can think about real property transferring. If we have cottages or recreational property, perhaps we want to think about advancing those to the next generation or ultimate beneficiaries over a period of time. As we've seen with the change to the capital gains rate, some strategies might be implemented here, where we are making that transfer over a number of years to maximize that $250,000 threshold that allows us to use our lower 50% inclusion rate. Or maybe we're lending money to a trust to purchase these assets from us, and then, again, realizing those gains over time. So there are some strategies that can be done and certainly should be looked into.
* Number four is, make use of the TFSA in retirement.
* Yes, well, so the TFSA is wonderful. It doesn't have an age, a maximum age limit on it. So you can continue to be earning income tax-free in your account throughout your retirement. So perhaps if you are receiving, RRIF proceeds, for example, which are required to be paid out, you can put those right back into a tax-sheltered environment and have them go into your TFSA. Perhaps we want to think about funding a spouse's TFSA as well. So you can give them money.
- They are able, then, to contribute that to their own TFSA. And because this is a tax-free environment, those attribution rules that I talked so much about wouldn't be applicable in this situation. And it's really important as well that your Tax-Free Savings Account, your withdrawals from that are not going to impact your Old Age Security entitlement. So I know there's a lot of sensitivity around the OAS claw-back. If you are funding from your TFSA account that will-- TFSA account account, it will allow you to really maximize the overall value of that.
* All right, last point, these are all fantastic. I got about a minute left. Take advantage of all the tax credits and deductions as you think about planning for your next year's tax season.
* Well, absolutely. Familiarize yourself with which options are available. And if you are going to be doing things like renovations to your home to make them more accessible so that you can age in place, familiarize yourself with the Home Accessibility Tax Credit. Really understand what their requirements there are. Familiarize yourself, again, with the medical expense credit, which can really apply to many more things than people typically think about.
- The Disability Tax Credit is another one that many people in retirement should consider whether or not they can qualify for. So this is a very underused credit that could be available to many people to help reduce some of the costs that are associated with aging and physical challenges as well. The Canada Caregiver Credit, again, available in retirement. And something that might not hit the radar is the use of the First Home Savings Account.
- So even though we do have a maximum age limit of 71, if you are in retirement earlier than that and you have not been a homeowner in the previous number of years and you qualify for that First Home Savings Account, consider whether or not it makes sense to make some contributions, which can be moved over into an RRSP, tax-free. So there are some planning strategies that might be available for that as well.
* Nicole, these are fantastic tips. We appreciate you sharing them with us. And we hope to talk to you again soon.
* Oh, my pleasure.
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- So, let's start. The first thing you say, though, to think about is, even before you actually retire, making use of spousal RRSPs is a good thing to think about.
* It is. It's something to consider and make sure that you're determining whether it's an effective strategy for you. So when we think about spousal RRSPs, what we're doing is having the higher income-earning spouse essentially income-split with the lower income-earning spouse and is giving them a contribution to their RRSP to help grow their retirement savings. This allows the contributing spouse, the higher income spouse, to use that deduction for the contribution against their own income.
- And then, in retirement, this has equalized the income streams a little bit between the higher and lower income-earning spouse so that we have income going into the hands of each of them and taxed at their marginal rate. So rather than having all of that income flowing out to the higher income-earning spouse in retirement, we're able to reduce their overall tax bill, put some of that income into the hands of the lower income-earning spouse, and have it taxed at their lower marginal rate. So overall, we have a lower family unit tax bill in retirement.
* Great idea. Number two is planning the order in which you draw from your income sources in retirement. This is the decumulation people like talking about. But it matters in which the order it happens. So take us through what is optimal.
* It does. And what's optimal will depend on what your goals are, what your personal circumstances are. So, just, there's no one size fits all for the optimal decumulation strategy. But there are some things you want to think about. So if you want to minimize risk, for example, you're going to want to draw down on your more volatile, aggressive investments first. If you are wanting to reduce the current tax that you're receiving in retirement, maybe you're thinking about pulling out of your TFSA, which you can receive tax-free.
- If you're wanting to reduce future tax, it would be a different strategy. If we're looking at growing our investments as much as we can, even though we're in retirement, we still want to see that growth, then we are wanting to think about keeping our investments in their registered form as long as possible and maybe accelerating our Canada Pension Plan and OAS, taking that earlier rather than later. If we're thinking about our estate value and how to maximize that, perhaps we're thinking about drawing down on our registered accounts first, which are fully taxable at death.
- So if you were to pass away having balance in your RRSP or your RRIF, that's going to be fully included in your income at your death and taxed at, presumably, the high rate. So it really does depend on what your overall goals are, what your assets and other investments are, depending on your cash flow and liabilities, whether or not you are taking from your registered plans first, and which ones, or whether you're claiming your CPP earlier or later really will depend on your personal circumstances.
* I love that. I love the fact that you always ask, what are we optimizing for? That's always the first question. So, OK, number three, I like this one. You say, make effective use of your surplus assets. I just want to start by saying, I hope everyone is blessed with surplus assets. What do you qualify as surplus assets?
* Well, exactly. Surplus means beyond what you need to fund your lifestyle in retirement. And that's factoring in everything. So, of course, put your own mask on first. Make sure that you have the investments and the cash flow that you need to fund your retirement. But to the extent you do have surplus assets, depending on what their form are and what your goals are, there might be some things you can do.
- So if we're thinking about, if you have income-producing assets, for example, maybe we want to accelerate the inheritance and be giving some of that to the next generation now as opposed to continuing to have those income-producing assets included in your income and taxed at your high rate. Maybe you're looking at a philanthropic strategy, where we're doing an overall plan that includes your charitable intentions and maximizing options like securities that have gains, being able to make those gifts in kind to a charity, and wiping out the capital gain entirely, which is very effective. Maybe you're thinking about utilizing a private giving foundation that allows you to really have a planned giving strategy to reduce your taxes yearly, but also in your estate.
- We can think about real property transferring. If we have cottages or recreational property, perhaps we want to think about advancing those to the next generation or ultimate beneficiaries over a period of time. As we've seen with the change to the capital gains rate, some strategies might be implemented here, where we are making that transfer over a number of years to maximize that $250,000 threshold that allows us to use our lower 50% inclusion rate. Or maybe we're lending money to a trust to purchase these assets from us, and then, again, realizing those gains over time. So there are some strategies that can be done and certainly should be looked into.
* Number four is, make use of the TFSA in retirement.
* Yes, well, so the TFSA is wonderful. It doesn't have an age, a maximum age limit on it. So you can continue to be earning income tax-free in your account throughout your retirement. So perhaps if you are receiving, RRIF proceeds, for example, which are required to be paid out, you can put those right back into a tax-sheltered environment and have them go into your TFSA. Perhaps we want to think about funding a spouse's TFSA as well. So you can give them money.
- They are able, then, to contribute that to their own TFSA. And because this is a tax-free environment, those attribution rules that I talked so much about wouldn't be applicable in this situation. And it's really important as well that your Tax-Free Savings Account, your withdrawals from that are not going to impact your Old Age Security entitlement. So I know there's a lot of sensitivity around the OAS claw-back. If you are funding from your TFSA account that will-- TFSA account account, it will allow you to really maximize the overall value of that.
* All right, last point, these are all fantastic. I got about a minute left. Take advantage of all the tax credits and deductions as you think about planning for your next year's tax season.
* Well, absolutely. Familiarize yourself with which options are available. And if you are going to be doing things like renovations to your home to make them more accessible so that you can age in place, familiarize yourself with the Home Accessibility Tax Credit. Really understand what their requirements there are. Familiarize yourself, again, with the medical expense credit, which can really apply to many more things than people typically think about.
- The Disability Tax Credit is another one that many people in retirement should consider whether or not they can qualify for. So this is a very underused credit that could be available to many people to help reduce some of the costs that are associated with aging and physical challenges as well. The Canada Caregiver Credit, again, available in retirement. And something that might not hit the radar is the use of the First Home Savings Account.
- So even though we do have a maximum age limit of 71, if you are in retirement earlier than that and you have not been a homeowner in the previous number of years and you qualify for that First Home Savings Account, consider whether or not it makes sense to make some contributions, which can be moved over into an RRSP, tax-free. So there are some planning strategies that might be available for that as well.
* Nicole, these are fantastic tips. We appreciate you sharing them with us. And we hope to talk to you again soon.
* Oh, my pleasure.
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