TORONTO —Taxes are rarely a consideration for most Canadians saving up for retirement, as RRSPs and TFSAs provide generous tax-sheltering opportunities.
But once the time comes to start tapping into your nest egg, tax efficiency becomes far more complicated, experts say. In addition to drawing income from your portfolio, you’ll need to combine it with government pensions and possibly employer pensions, while accounting for potential clawbacks to government benefits like Old Age Security.
Adding to the complexities is that every person’s situation will be different, says Daryl Diamond of Diamond Retirement Planning Ltd. in Winnipeg and author of Your Retirement Income Blueprint.
“There is no one formula that applies to everyone where you push a button and that’s the solution,” he says. “This is really a point in time where people need specialized advice.”
When working with clients, Diamond says the first thing he looks at is all their different sources of income coming from registered and non-registered accounts, with a view toward long-term tax efficiency.
“It’s not just simply a question of how do I make it tax efficient today, but also down the road 10, 12 and 15 years later,” he says.
“And I say this because people are still being told to spend all their non-registered money first and defer all their registered money, which in certain situations might make sense, but not in a heck of a lot of others.”
Diamond says while deferring RRSP withdrawals in retirement allows you to keep sheltering investment gains, that could put you in a bad position at age 71 when you’re required to convert your RRSP into a RRIF and start making mandated withdrawals. Because tax rates increase at higher levels of income, you could find yourself in a situation where your OAS or other types of government benefits are clawed back.
Another potential tax upside to early RRSP withdrawals or converting to a RRIF early is risk management after the death of a spouse, says Justin Bender, a portfolio manager at PWL Capital in Toronto.
“We’ve seen a lot of cases where you have two spouses and both of them will have large RRSP accounts and throughout retirement one of them passes away earlier than expected and all the RRSP assets go over to the other spouse,” he says. As a result, both RRSPs are taxable in the one spouse’s hands, and with no ability to income split, mandated RRIF withdrawals become larger and OAS is clawed back altogether.
When it comes to tax-efficient withdrawal strategies in retirement, Diamond says what he has found to be effective is “all of the above,” meaning a balanced approach including early withdrawals from fully taxable sources such as RRSPs, pensions and government benefits.
Bender says anyone approaching retirement should get in touch with a fee-only planner or an adviser who can run various tax-planning scenarios—accounting for everything from your marginal tax rate through retirement to the impact of private pension income—to determine the best plan.
“Why would people pay tax needlessly and lose government benefits needlessly because their level of income is too high,” he says.
“And yet we see it all the time when people come into our office to make this work more efficiently.”