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

What is the process of a comprehensive financial plan?

Posted by Frank Wiginton on Tue, Nov 15, 2016

A proper comprehensive financial plan takes on average 20+ hours to prepare and depending on the complexity could take many, many more. If the following steps aren’t taken then you have to wonder how comprehensive the plan really is!

Initial Interview (1-2 hours)

The process begins with a 1-2 hour interview where many questions are asked to get a big picture of your situation and you are encourage to think about areas you may not have considered. It concludes with the signing of an engagement agreement outlining both parties roles and responsibilities.

Data Gathering

You are asked to fill out a comprehensive questionnaire and supply copies of investment documents, insurance policies, mortgage documents, Wills, Powers of Attorney, Trust indentures, incorporation documents, tax returns, and any other pertinent information.

Data Analysis (5-6 hours)

All the data is taken in conjuction with the information from the initial interview and an initial draft of the plan is drawn up with some solutions and recommendation.

What is the process of a comprehensive financial plan?Draft Plan Review Interview (2-3 hours)

A draft plan is reviewed and open discussion about your likes and dislikes about it and you are encourage to offer up additional suggestions as to how you would like see the plan. This typically takes about 2-3 hours depending on the complexity.

Preparing the Plan (3-5 hours)

Following the review, the plan is refined incorporating the ideas and solutions identified and suggested. Then the final plan is put together.

Plan Review (2-3 hours)

The plan is reviewed thoroughly to ensure you completely understand and agree with all aspects of it. The plan is continuly adjusted until you are 100% satisfied with it.

Plan Implementation (2-3 hours)

The solution needed to implement your plan are sourced and presented to you. All aspects of those solution clearly explain to ensure you are 100% comfortable and begin the implementation process.

Regular Follow Up

This is especially crucial in the first three months following the implementation of the plan to ensure that all questions and concerns are addressed and the implementation has been a success.

Following the completion of a plan we offer to answer any questions or concerns you have at anytime. As a trusted resource for unbiased financial information we are here to guide and advise you. We will work with you at no cost to update and change your financial plan through every significant life change and or every 18 months. It is important to know that your plan is on track and have the confidence to go out and live your life!

To start your financial plan or to learn how I may be able to help you please contact us.

Tags: certified financial planner, Financial Planning, Personal Finance, financial plan, Tax Planning