Frankly Speaking

Reduce Your Retirement Tax Bill: Part 1 - Income Splitting

Posted by Frank Wiginton on Tue, Nov 15, 2016

Many people pay too much tax in retirement. This is generally due to a variety of things but they all come down to not having prepared a proper comprehensive financial plan! The big question most people in retirement have is “Will I run out of money?”

There is a great calculator on the home page of my website at www.frankwiginton.ca that will tell you whether you will run out of money, and if not, how much you will still have left as an estate. It will also tell you approximately what your lifetime tax bill will be. You will likely be surprised by the numbers – many are!

This is a four part series that talks about various ways to reduce your taxes throughout retirement.

INCOME SPLITTING

Canada Revenue Agency allows you to split your income with a spouse or common law partner. You don't have to technically give them the money (which is probably a good thing in some cases), it is simply an election you make on one tax return and a declaration to accept the additional income on the others form.

Most tax software's like QuickTax and Ufile have tools that will automatically help you figure out the optimal amount of income to share and even fill out the proper forms for you.

Not all income can be split. This is where working with a financial planner to prepare comprehensive financial plan can help you understand what income can be split.

Pension income: if you receive income from a defined benefit pension plan at any time this income could be split with your spouse.

RRSP/RRIF income: any time you withdraw money from an RRSP. You cannot split it with your spouse. Only once you have converted your RRSP into an RRIF and you are 65 years of age or older can you then split the income with your spouse.

Investment income: in order to split investment income the account that you hold needs to be in joint ownership.

CPP: in technical terms, CPP cannot be split with a spouse. What you can do is apply to have your CPP credits assigned to each other. In order to do this you need to make an application to CPP and asked to have both yours and your spouses, CPP credits assigned. So simple example would be you would have 10 CPP credits and your spouse would have eight credits they would combine them into a total of 18 credits and then divide them by to giving each of you nine CPP credits.

Old Age Security/Guaranteed Income Supplement (OAS, GIS): neither of these social assistance payments can be split, but through income splitting you can help to ensure you don't have these incomes clawed back.

As you can see most of the income you could expect to receive in retirement can be split or shared with a spouse. Some of the income that cannot be shared with the spouse may be employment, income some forms of business income, and of course income that is only directly related to you and your investments.

So to look at an example a couple may need to have $60,000 a year after-tax money in order to have the lifestyle and pay the bills and do the things that they want in retirement. In preparing a proper financial plan for them this would mean we would aim to give each of them $35,000 of gross income. their average tax rate would be about 14%, and this would leave them each $30,000 of net cash in their pocket income.  This assumes that all of the income they receive is fully taxable.  (this is the subject matter for another segment).

As you can see income splitting can be a very powerful tool in ensuring there is sufficient income in retirement and recognizing that you don't need large sums of money to achieve the financial goals that you're looking for.

In the example above we only needed to draw $70,000 of assets in order to generate $60,000 of net income.

In the upcoming segments.  We will talk about ways to generate tax efficient income.  Reduce the taxation on your investment assets and look at a few strategies to reduce your lifetime tax bill.

How much income do you need to have in retirement?

What is your average tax rate in retirement?

How much money do you think you need in retirement to live comfortably?

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Tags: CPP, OAS, HubSpot Tips, retirement income, taxation, income splitting, income planning, financial plan, Canada revenue agency, RRSP/RIF, defined benefit pension, pension, ufile, quick tax, GIS, clawback

Identifying Income: Budgeting 101

Posted by Frank Wiginton on Tue, Nov 15, 2016

There are two sides to a budget – Income and Expenses.

Many when they build a budget will take their most recent pay and use it to determine how much  income they have coming in every month. This will start their budget off by several hundred dollars!

First many get paid on a bi-weekly (every two weeks) basis. So simply multiplying by two will have you underestimating your income by 8.3%! This could represent your retirement savings!

Second Some of the deductions on your pay are considered expenses and should be put in the expense column. So you may end up double counting these expenses. Most common is retirement or pension contributions that come right off your pay cheque. Other items might be life or health insurance premiums, union dues, gym memberships, etc. These automatic deductions can skew your actual income.

Third – Depending on your income and the time of year that you run your budget you may have CPP and EI deduction being taken off or you may not. If you earn $44,000 or more you will max out your contributions to CPP and EI. Once you have reached this amount of income you will no longer have those deductions.

TIP:  If you make more than $44,000 the easiest way to deal with those deductions is to take the max CPP and EI amounts for the year and divide them by 12 and subtract that amount off your income. (2010 MAX CPP premium $2163.15 /12 = $180.26, MAX EI Premium $747.36 /12 = $62.28 )

If you are self employed, commission income, or variable income; take the income from last year and give serious thought as to whether this years income will be more or less and try your best to estimate what you think you may earn. Speak with your bosses about what they think is realistic and then once you have determined a number take off 20% to be conservative on your budget. Any extra that you do earn can to a seperate fund to pay for your “Nice To Have” goals!

If you have two or more incomes contributing to the expenses you need to do this for each one and add them all together.

To help you identify other income sources such as dividend and investment income, rental income, alimony/child support, etc; it is easiest to take last years tax returns and go through the 100′s and 200′s section of the T1 General. This is where you list all income.

Watch for my book “One Day A Month To Financial Success” due out October 2011!

Tags: Budgeting, CPP, taxes, income, EI, Financial Planning, Debt, Budget

Poll: New PRPP - Do you have the money for it?

Posted by Frank Wiginton on Tue, Nov 15, 2016

The federal government wants to bring in a the new Pooled Registered Pension Plan. It will force all employers to offer it but they do not have to contribute to it. You the employee can contribute to it but you are not forced to participate.

I wonder how this is much different than group RRSP's or regular RRSP's for that matter.

My question to you is: Just because there is another retirement savings option - Do you have extra money to put towards it?

Take the poll!

Tags: CPP, Poll, RRSP, PRPP