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

6 Tips for When You Lose Your Job!

Posted by Frank Wiginton on Tue, Nov 15, 2016

Unfortunately, this is a key life event that will be happening more frequently in the coming months, and how someone handles it could have a big impact on their future financial wellbeing. At TriDelta Financial, as part of our financial planning work, we work with those who are worried about being laid off, and occasionally after it has happened. Here are 6 key tips that we review with clients in this situation.

1. Don’t sign anything right away.

If you are being fired, your employer will likely provide you with some form of severance offer. The time to sign it is only after you are able to think clearly, do some research, and understand your options. At the time of termination a new contract is being negotiated which defines the terms which will end the first contract. The time to protect your rights is at the time of termination, not later. If the agreement is signed the employee cannot come back later after receiving legal advice or after months of unemployment, to renegotiate the deal.

2. Get a secured line of credit in place before something happens or as soon as possible if something does.

If you own a home and have equity in the home, a secured line of credit is the most cost effective and easiest loan to set up. While it can be used for anything, it can be a lifeline and provide significant peace of mind in case of unemployment. While it isn’t the goal, to use $50,000 of a $300,000 line while unemployed for a year, and then pay it off in your first couple of years in the new job – can make a very stressful time, much less stressful. If you are not working, it is much more difficult to get approved for a line of credit. A mortgage broker can be a good alternative to your local bank in terms of options.

3. Negotiate more than just money – although more money helps.

In addition to cash, other potential items include having the company pay for ‘outsourcing’ or ‘job counselling’ to help you find a new job. The company can pay for a consultation with a lawyer or financial planner. There might be room to extend health and pension benefits. Perhaps you can negotiate a recommendation letter. As with all negotiations a termination package can be successfully negotiated when you understand your legal rights, are reasonable, and effectively advocate for a fair and reasonable package.

4. If there are health issues, be sure to convert group plans into an individual policy.

If someone has health issues, a group insurance plan is a great way to get coverage. When you lose your job, you lose your group coverage. In many cases, if you act within 30 or 60 days, you can convert group plan coverage into personal coverage without a medical. Unless you are in excellent health, this could be your only chance to obtain sufficient insurance coverage at a standard rate.

5. Proper Tax Planning can save you significant costs.

Examples might include, taking a severance package over 2 calendar years or even deferring it to the next year. If you worked at the company since 1996 or earlier, you can qualify for a retirement allowance to go directly to your RRSP as opposed to being taken as income. Even if you started in 1997 or later, there may be RRSP room to shelter some severance payment.

6. Do you take the pension or the cash?

For some, there is a big decision to make about their pension plan. If you have this choice, among the factors to calculate are – what type of rate of return does your pension provide. How long do you think you will live? What type of investment yields can you achieve in a personal investment portfolio (today might be one of those rare times when you can set up a portfolio with much higher income than your pension plan)? How much are you willing to pay for the peace of mind of a fixed pension. Is the company going to be able to maintain the full pension in the future?

Regardless of your employment situation, it is important to understand your rights and where you stand financially. Working with a Certified Financial Planner to build a comprehensive financial plan will provide you with the knowledge and a coach to ensure that you make the right decisions.

At TriDelta Financial Partners we work with you to develop a comprehensive plan and offer you independent, unbiased solutions to meet your needs and goals. Whether it is a mortgage or line of credit, life or critical illness insurance, investment management, or just proper planning advice, we are here to help.

Tags: health insurance, group health insurance, Financial Planning, Insurance, severance pay, Line of Credit, pension, Tax Planning, commuted value, severance, severance package, Severence deferral