People often make the mistake of thinking that tax planning ends when their employment income stops – but post-retirement tax strategies can be vital to maintaining the retirement lifestyle you want throughout your retirement.  That’s especially true these days as so many of us retire earlier and live longer, healthier lives.

Retirement tax planning should focus on these three income-protecting areas:

1.       Take full advantage of all the direct tax reductions available to you.

2.       Keep your net income and taxable income low enough to avoid such potential pitfalls as the Old Age Security (OAS) clawback, or losing out on the age tax credit and possibly the GST credit.

3.       Ensure that your monthly cash flow is not eroded by increases in the cost of living, and that your investments last a lifetime.

With these three objectives in mind, here are some post-retirement tax-reduction and income-protection strategies to consider:

·         Plan RRIF withdrawals. Registered Retirement Income Fund (RRIF) withdrawals are fully taxable – so manage your taxable income by withdrawing as little as possible each month. You will have to take out the minimum amount required by law, but try to avoid additional withdrawals that will inflate your reportable taxable income.

On the other hand, if you’ve retired early and your pension benefits have yet to kick in, it might make better tax sense to withdraw from your RRIF now instead of later.  If you are age 65 or older, and you don’t have other eligible income, make sure you take enough out of your RRIF to qualify for the annual $1,000 pension income credit.

·         Be tax efficient in your asset allocation. You can reduce taxes by keeping fully-taxable, interest-generating investments inside a tax-sheltered RRSP or RRIF as long as possible, while keeping assets that are taxed less – those that generate capital gains or Canadian dividends – outside your registered plans.  Watch out for the dividend tax credit though, because it can increase your taxable income and possibly trigger clawbacks.

·         Use all your tax credits and deductions. Take full advantage of all available tax breaks, including the age credit for those age 65 and older, pension income credit, and medical expense credit.

·         Give CPP/QPP benefits to your spouse. You can reduce taxes by splitting Canada or Quebec Pension Plan (CPP/QPP) income with the spouse having the lower CPP/QPP entitlement who is in a lower tax bracket.

·         Contribute to a spousal RRSP. You must close down all your RRSPs in the year you turn age 69, but you can still contribute to a spousal RRSP if your spouse is younger, as long as you have earned enough income to generate contribution room.  As the contributor, you get the tax deduction. And by shifting assets to the lower-income partner, you may also enjoy a reduction in the combined amount of taxes payable by both spouses. But, there may be other aspects of a spousal RRSP to consider, so speak to your financial advisor.

·         Consider a Monthly Income Portfolio*. Retirees often favour such “safe haven” investments as Guaranteed Income Certificates, bonds or mortgages for the non-registered portion of their portfolio.  However, the returns from “safe haven” investments are very low and the income you receive is usually fully taxable when earned, whether or not you immediately receive the interest.

Chances are that you will experience a significant reduction in your buying power due to inflation in your retirement years. An investment in a Monthly Income Portfolio (MIP) can be the ideal means of protecting your income against inflation. This new investment approach generates a stable and reliable income distribution (outside your RRIF or RRSP) and potentially higher long-term growth. If you choose the “T” series of the MIP, a portion of the monthly distributions you will receive represents a return of capital, which is paid to you on a tax-free basis. This could help to reduce OAS clawbacks.

Smart tax planning and investment strategies can save and make you money through all the years of your retirement. A professional financial advisor can help formulate the strategies that work best for you.

* Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments.  Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. Insurance products and services distributed through I.G. Insurance Services Inc. Insurance license sponsored by The Great West Life Assurance Company. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.