Kozak Financial Group
November 07, 2022Money Education Financial literacy Lifestyle Entrepreneurs Women & wealth Professionals Quarterly commentary Monthly commentary
How to approach taxable income in your retirement portfolio
No matter where you are in your financial journey, there is a seemingly never-ending supply of information on how to save for the future. Which tax-sheltered plans you should use and when to use them, how to set and achieve a savings goal, when to pay off your mortgage and countless other topics are just a Google search away. And yet, there is surprisingly little information available on how to draw down your savings through retirement.
If you are like many of our clients, in one way or another, you have spent your career putting money aside, whether that was to maximize your registered savings plans like RRSPs or TFSAs, to invest within a professional corporation or to grow a business to the point of salability.
No matter what your strategy, you have no doubt amassed wealth from which you now need to draw income. How does all this turn into a retirement income stream that can help you live comfortably?
While every situation is unique and there is no one-size-fits-all answer, the Kozak Financial Group has a few rules of thumb that we like to follow when advising our clients on how to turn their investment portfolio into an income generating tool. When making these decisions for yourself, you should consult with a tax professional.
If a client has a professional corporation, we advise them to draw down on the company’s assets first where they wish to simplify the administration of their savings and eventually save the cost of preparing a corporate tax return. A corporation adds complication to one’s retirement, so unless the corporation is substantial enough, we find it is often in a client’s best interest to draw from this aspect of their retirement portfolio first.
If you don’t have a corporation, we typically advise clients to begin withdrawing from their RRSP or RRIF accounts first where there is a substantial opportunity to split this “pension” income between you and your spouse.
While it may not be top of mind in the early days of retirement, in the future when one of you passes away, the surviving spouse will continue receiving the same or a similar amount of income and you will not have the ability to split income onto two tax returns. This could mean not only higher taxes payable, but perhaps a claw back of part or all of their Old Age Security benefits, as well.
At the very least, you should make sure you are receiving the benefit of the pension tax credit. If you have no other pensions, you could withdraw up to $2,000 from a RRIF each year essentially tax free. This means that between the ages of 65 and 71, when your RRSP must fully be converted into a RRIF, you could get $10,000 out of your RRSP with minimal consequence.
Finally, we look towards TFSAs and non-registered investment accounts. These types of accounts have less deferred tax liability. As a result, we tend to utilize these accounts on an as-needed basis, whether that means leaving them for last after other savings plans have been depleted or using them as you go to top up income from other pension sources. Some may draw down these accounts prior to the higher taxed income streams.
In the end, your path to retirement is unique. By starting with professional corporations and registered savings plans, you can simplify your holdings, maximize your income splitting and hopefully chart a course for a clearer financial future. You should consult your tax and wealth advisors on your specific situation.