3 Ways to Maximize Benefits in Retirement.
WHEN CANADIANS AGE 65 OR OLDER think about their overall retirement plan, most focus on ensuring their savings, investments and other forms of income are appropriately managed. But most people’s retirement income also includes a range of valuable benefits available from the government, two of the most familiar ones being Old Age Security and the Age Credit. And a critical feature of these benefits is that they’re highly connected to your taxable income. They can be clawed back or forfeited altogether if your reported income (line 234 of the federal tax return) is too high.
Therefore, in order to avoid reducing the government benefits you receive, you may want to think about ways to reduce your reported income. Here are a couple of straightforward approaches you can take.
1. Effectively structure non-registered investments It’s important to understand that each type of income from non-registered investment sources is treated differently for tax purposes. For example, only half of net capital gains are included in your taxable income, whereas interest income from investments, such as GICs, is fully reported as income.
Dividends received from Canadian corporations are another consideration. Although the dividend tax credit does provide for preferential tax treatment, it is the grossed-up amount that is reported as taxable income and that is used to determine eligibility for income-tested benefits (such as Old Age Security).
This is where proactive management of your income-generating investments comes into play. Knowing how different investments affect reported income can help you identify opportunities to structure your investments in tax-advantaged ways to help reduce clawbacks and preserve your wealth. As demonstrated in the table below, some options to consider include prescribed annuities, withdrawals from a mutual fund or segregated fund contract, or distributions from a Series T mutual fund.
2. Optimize tax deductions From a tax perspective, the arrival of retirement means that many familiar tax deductions are no longer available, such as Registered Retirement Savings Plan (RRSP) contributions, pension plan contributions, child care expenses and union dues. But you do have other options for generating deductions.
Maximizing RRSPs: If you have any RRSP room left, making a lump-sum contribution before you convert it to a Registered Retirement Income Fund (RRIF) can be advantageous – the resulting deductions can be spread over a number of years.
Borrowing to invest: For those who have additional income over and above what’s required for living expenses, coupled with a higher comfort level with investment risk, a borrowing strategy may be worthwhile. Specifically, a tax deduction can be created when you use RRIF or other discretionary income to pay interest on funds that were borrowed to invest.
Speak to an advisor Whether you’re nearing or already in retirement, it’s worthwhile to contact your advisor and tax specialist for more information. They are the best resources for information on how to help avoid clawbacks and how to maximize government benefits.
Discipline is what it takes to block out the noise, commitment is what it takes to walk the path to financial success and patience is what it takes to reach the goal.