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Enjoying your retirement while minimizing
tax takes careful planning. By the end of the year you turn 69, you
will have to decide what to do with your RRSP. One option is to
convert it into a Registered Retirement Income Fund (RRIF). Once
your RSP assets are converted to a RIF, you must withdraw a minimum
amount each year for tax reasons. Many advisors recommend you
withdraw only the required minimum amount. While this is helpful, it
is not necessarily the best advice all the time. This article will
illustrate why each situation has to be reviewed carefully to
determine the retirement income strategy that's right for you.
Review
All Income Sources and Assets
Start by reviewing all income sources from
both spouses. Each income will have tax considerations, which also
need to be factored in. Every couple's assets are unique. Pension
incomes, non-registered holdings, registered holdings, and real
estate investments all require different considerations. You must
know exactly which assets are owned by each spouse, as well as the
adjusted cost base and market values of holdings.
The best solution depends on your
situation. For couples with one significant pension, every effort
should be made to build sheltered and unsheltered assets in the name
of the spouse without the pension. Many are splitting their RSP
holdings by using spousal RRSPs. However, other assets — such as
pension, incomes, unsheltered assets or real estate owned by one
spouse — can make RSP-splitting counterproductive. You need a
complete asset picture to determine this. For couples with two
pensions, careful review of exactly how each works, and the
survivorship options, is essential.
The Canada Pension Plan (CPP) and Old Age
Security (OAS) should also be part of the strategy. The CPP for a
high-income spouse should be split with the low-income spouse. CPP
for a lower-income spouse should usually be kept in his or her name.
OAS has to be reviewed to ensure that you
are not losing income due to the "clawback" rules. In
2002, each spouse can collect up to $5,312 per year from OAS once
they reach age 65. This amount is partially "clawed back"
if your income is above $56,968 and fully "clawed back"
once your income reaches $92,381. Therefore, a couple with one
income of $100,000 and the other at $55,000, requiring another
$5,000 per year, may be better to withdraw from the higher income
spouse to eliminate the OAS clawback. Each situation is different,
and requires planning for the best result.
Pay
Each Spouse at Least $30,000 per Year of Taxable Income
The first approximately $30,000 of taxable
income received by an individual is taxed relatively lightly. On
your first $30,000 of taxable income the total taxes you pay are
between $5,000 and $6,100, (except in Quebec, where you pay $7,100)
taking into account the basic personal tax credit. This gives an
average tax rate of 17 per cent, and 24 per cent in Quebec. Everyone
should take advantage of this relatively low tax bracket in planning
their retirement income.
Here are examples of how you factor this
into your planning. If you have one spouse with an unavoidably large
taxable income during retirement, keep your RSP sheltered as long as
possible, and take only the minimum. In the case of uneven
retirement incomes, you usually need to do everything possible to
minimize the income drawn from the higher-taxed person and bring the
lower-taxed income up to the $30,000 mark.
Base
RRIF Payments on the Younger Spouse's Age
It is always recommended that RRIF payments
be based on the younger spouse's age, because the minimum RIF
payment is determined by age and increases each year. Using the
younger spouse's age sets your minimum payment lower and gives you
greater flexibility on how much taxable income you draw, since you
can always withdraw more than the minimum.
| RRIF
Minimum Withdrawal Table |
 |
| Age
@ Dec 31 of Prior Year |
Minimum
Annual Payout |
|
| 65 |
4.00% |
| 66 |
4.17% |
| 67 |
4.35% |
| 68 |
4.55% |
| 69 |
4.76% |
| 70 |
5.00% |
| 71 |
7.38% |
| 72 |
7.48% |
| 73 |
7.58% |
| 74 |
7.71% |
| 75 |
7.85% |
| 76 |
7.99% |
| 77 |
8.15% |
| 78 |
8.33% |
| 79 |
8.53% |
| 80 |
8.75% |
| 81 |
8.99% |
| 82 |
9.27% |
| 83 |
9.58% |
| 84 |
9.93% |
|
| *
There is no maximum payout limit for RRIFs |
Tammy Osborne is a
financial consultant with MD Management's Newfoundland and Labrador
regional office.
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