Tax management in retirement Maximizing retirement income Jennifer Poon, CPA, CA, CFP Director, Advanced Planning, Wealth
Disclaimer • The following information is being presented with the understanding that it is intended for information purposes only • Neither Sun Life Assurance Company of Canada nor the presenter has been engaged for the purpose of providing legal, accounting, taxation, or other professional advice • No one should act upon the examples or information without a thorough examination of the legal/tax situation with their own professional advisors, after the facts of the specific case are considered
Agenda • Pre-retirement tax planning • Tax objectives in retirement • Tax bracket management & sources of retirement income • Tax planning practices in retirement 3
Pre-retirement tax planning
Key inputs in a typical retirement plan • Retirement age (or years to retirement) • Retirement income needs 5
Tax objectives for growing your wealth Reach retirement goal faster Higher reinvestment rate Possibility for Tax savings & lower risk on required return tax deferrals • Near pre-tax return • Lower pre-tax required return • Higher annual compound growth 6
Common techniques • Maximize RRSP • TFSA • Tax-efficient non-registered investments • Corporate class • Permanent life insurance products • T-series • Other 7
Tax objectives in retirement What happens when clients reach their retirement? 8
Shift the focus in retirement • Longevity risk • Withdrawal rate • Income replacement rate 9
Make it last • Withdrawal rate • Maximize government and other sources of income • Generate required income from portfolio • Maximize estate value 10
Preserve estate assets • Not all pension sources can be passed on to the next generation • Company pension • OAS, CPP, QPP • Tax savings from age/pension related tax credits • Drawing on the above sources first means more personal assets to pass on to loved ones 11
Risks to applying pre-retirement tax principles in retirement • Maximize tax deferral • RRSP: defer withdrawals until age 71, only drawing out the age minimum • Consequences: • RRSP continue to grow to a larger sum • Large registered balance will trigger larger age minimum withdrawal • Large taxable amount will put clients in a higher tax bracket • Potential to lose government pension benefits or credits 12
Risks to applying pre-retirement tax principles in retirement • Only hold retirement assets in registered accounts • Put all retirement savings in RRSP to maximize tax deductions during working years • Require larger withdrawals to provide for income needs • Larger taxable income inclusions • Avoid taxable events • May be beneficial to trigger taxable events to crystalize gains, minimize estate tax liabilities, or facilitate gifting or inter-generational asset transfer • Controlled taxable events 13
The importance of tax bracket management 14
Tax bracket management • Determine target tax bracket • Maximize taxable income to upper limit of tax bracket to take advantage of lower marginal tax rate • Reduce taxable income to stay in the upper limit of desired tax bracket to avoid a higher marginal tax rate 15
Target tax bracket • Required after-tax income • Sources of income • Government benefits income thresholds • Effective tax rate at death 16
Government pension benefits • Eligibility based on: • Age • Residency • Income • Contributions • Managing taxable income within income threshold 17
Snowbirds – cross-border issues • Residency for government benefits • Residency for Canadian tax • U.S. estate tax • U.S. gifting tax • Foreign assets • Foreign sources of income 18
Sources of retirement income 19
Canada pension plan (CPP) • Must apply • Can apply as early as age 60 • Average amount paid is $610.57 monthly ($1,065 monthly maximum) • Key change effective January 2012 • For ages 60-65, clients must make CPP contributions based on employment income 20
Old age security (OAS) • Must apply • Monthly payment for most Canadians based primarily on years of residency in Canada • New 2016 Federal Budget sets OAS eligibility back to age 65 21
Guaranteed income supplement (GIS) • Must apply • File an annual tax return • Additional money to OAS for low-income seniors living in Canada • Eligibility follow the same changes as OAS 22
Government pension benefits • • • • • 1 Net income before adjustments (line 234 on your tax return) for the period July 2016 – June 2017 23
Tax planning practices Tax credits and pension splitting 24
Available tax credits • • • 1 Net income (line 236 on your tax return) 25
Pension income credit • Line 115: (T4A income) most pension income including pension, foreign pension income, annuity, RRIF and LIF payments • Line 116: elected pension split amount • Line 129: (T4RSP) RRSP withdrawals 26
Pension income amount • Pension income and some foreign pension income 1 • Registered Retirement Income Fund (RRIF) • Pooled Registered Pension Plan (PRPP) and PRPP funds transferred to Registered Retirement Savings Plan (RRSP), RRIF, and annuity • RRSP withdrawal before age 65 – only as a result of death of a spouse or common-law partner • Income from an annuitized RRSP • Retirement Compensation Agreement (RCA) amounts for pensioners age 65 or older 1 Not all foreign pension income will qualify. 27
Eligibility for pension income splitting • The client and their spouse/common-law partner: • Were residents of Canada at tax year-end or date of death • Were not separated or living apart for more than 90 days in the start of the year, due to breakdown in marriage or common-law relationship • The transferor: • Received pension income in the tax year that qualifies for the pension income amount, or • Is at least 65 and received qualifying amounts from a retirement compensation arrangement (RCA) 28
Ineligible for pension income splitting • OAS pension • CPP/QPP • Foreign pension income that is tax-free in Canada • Income from a United States individual retirement account (IRA); or • Amounts from a RRIF and transferred to an RRSP, another RRIF or an annuity 29
How does pension income splitting work? A = number of months the client was married or living as common-law B = number of months in the tax year C = total amount eligible for pension income splitting from transferor Maximum transfer amount = A x C x 50% B 30
Example – pension income splitting 1 Average Canadian taxes payable, 2014 combined federal and provincial tax rates effective March 2014 31
Investment income preference • Interest taxed as an ordinary income • Under $72,000 • Eligible dividends • Under $52,000 • Capital gains • 50% taxable • Under $144,000 • No taxable income 32
Tax free savings account (TFSA) • TFSA transaction summary • 2016 annual contribution room reverse back to $5,500 per year • If you have never contributed, cumulative room of $46,500 • No income tax on withdrawals • Contribute for spouse/partner/children over 18 33
Tax free savings account (TFSA) • Tax shelter for taxable income • No tax on withdrawals • Flexible cash flow without moving the client outside the target tax bracket 34
Non-registered investments • Owned by the individual • Includes, but not limited to: • Equities (stocks) • Bonds • Mutual funds • Segregated funds • Payout annuities • Shares in a private corporation • Property • Included in your retirement plan income calculation 35
Prefer no taxable income? The situation 1. Outside target tax brackets and does not require cash flow stream from the investment until later 2. Outside target tax brackets and require cash flow from the investment 36
What is T-Series? • T-Series provides 5% or 8% fixed monthly distributions • Distributions consist mostly of the investor’s original capital • Not included in current year’s taxable income A return of capital reduces an investor ’ s adjusted cost base (ACB). Capital gains taxes are deferred until units are sold or until the ACB goes below zero. 37
No tax on return of capital Low risk High risk 1 Highest combined Federal and Ontario marginal tax rates 2 A return of capital reduces an investor ’ s adjusted cost base (ACB). Capital gains taxes are deferred until units are sold or until the ACB goes below zero. 38
Key benefits of T-series • Flexible cash flow • Avoid OAS clawback • Maximize government benefits 39
Meet Marie Case facts Age: 72 Pensioners with $3M in assets Required income = $90,000 OAS, CPP and RRIF withdraws = $67,000 Conservative portfolio consisting of mostly fixed income mutual funds and Canadian equity mutual funds Assets Current yield Investment income House $1,000,000 0% $ - Equity mutual funds 750,000 2% 15,000 Fixed income mutual 1,250,000 3% 37,500 funds Total $3,000,000 $52,500 For illustrative purposes only. 40
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