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.
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?
Download a FREE copy of my NEW E-Book