The biggest expense in most Canadian’s lifetime is their tax bill. In fact, it can exceed the combined costs of your mortgage, children’s education, travel and cars. As a result, it is incredibly important to manage your tax bill, not just today, but also with a view of your taxes tomorrow.
You see, when couples retire, they are far better able to manage their tax bill than during their working years. It is a very important reason why those couples that manage their savings and investments separately during their working years really should plan their retirement income together. Pension income splitting means that for those who qualify, you can shift pension income (CPP, RRIF, LIF and actual pension plan income) into the hands of a lower income spouse to take advantage of their lower income tax bracket. Not only is this a great benefit to reducing a household’s overall tax bill, it is also a great way for both people to reduce or even avoid all together the Old Age Security (OAS) Claw Back. That claw back is an extra 15% tax. By splitting income across two people, your ability to each maintain your income below that claw back threshold is greatly improved. Pension income splitting can result in a lot less tax and preservation of government benefits.
One of, if not the, greatest risk that married couples face is that two become one early in the retirement years. All told, on average, widows report a 40% drop income when they lose their spouse. Not only do they lose their spouse’s OAS (and maybe even part or all of their own), they lose at least a portion if not all of their spouse’s CPP, and their spouse’s pension typically gets reduced by 40%. On top of all of that, their tax bill goes up because they can no longer pension income split. How a couple manages their taxes and their savings together can greatly impact a survivor’s income later. You see, a single person in retirement pays more tax for the same level of household income than a married couple pays. The more tax you have to pay, the more savings you draw on each year to fund your retirement, and the greater the risk you run of not being able to maintain your lifestyle for your lifetime.
- Retire with a combination of accounts – RRSP / Pension, TFSA and Non-Registered Accounts. Each have their own tax implications and with that, how you use them in retirement can make for a more optimal tax-efficient income for couples and for those who are single.
- Plan ahead – For couples, run two retirement income scenarios – both of you live long healthy active lives, and a second scenario of everything being taxed as if there is just one of you. How will a survivor fare? Are they going to be ok, or do you need to explore strategies for protecting each other, just in case?
- Keep some life insurance going into retirement – one of the first things people do when they retire is look to reduce expenses and all too often cancel their life insurance. Keeping at least some insurance through at least the early retirement years can provide a tax free injection of capital that can be used to replace lost CPP, OAS, pension income and higher taxes, to financially protect the survivor.
Remember, more important than what you make is what you keep. Every dollar you can legitimately save in tax is a dollar that is there for you tomorrow, regardless of your marital status. Keeping your tax bill low is a critical success factor in ensuring you can retire comfortably and remain that way for your lifetime.
As with any tax-related issues, you should always consult with a tax-planning professional or accountant to ensure you consider your own unique financial circumstances.