The impact of your marginal tax rate
It’s essential to be clear, Ken, that a zero-withholding RRIF minimum withdrawal doesn’t mean the income is tax-free. If you report your RRIF and other sources of income in your tax return for the yr, you could still must pay taxes.
Canada has progressive tax rates, so higher income levels are taxed at higher rates. In Ontario, for instance, the primary $12,000 or so that you earn is tax-free. There is a 15% tax on the subsequent $3,000 or so. And the subsequent $36,000 of income incurs about 20% tax. The kind of income you earn can change these rates, as can tax deductions and credits. But if we continued to earn higher incomes, tax rates would regularly increase.
If you could have the next income, your entire income is not going to be taxed at the upper rate. Incremental tax rates mean that income is taxed at different rates as you progress up in tax brackets.
For this reason, retirees often owe taxes. If you could have a pension of $10,000, you usually are not allowed to withhold tax. However, if you could have $60,000 in other income, you’ll have to pay 30% taxes on that retirement income.
Advance orf tax rate Inquiries
If you owe greater than $3,000 in taxes for 2 consecutive years (or $1,800 in taxes for 2 years in Quebec), the Canada Revenue Agency (CRA) (or Revenu Quebec) will ask you to file your taxes for that to be paid upfront for the next yr. This known as quarterly income tax installment filing.
Installments – together with OAS reclaims – are typically the 2 most damned tax issues for retirees.
You can reduce your rates by requesting higher withholding in your CPP, OAS, pension or RRSP/RRIF withdrawals, Ken. This optional tax withholding could also be preferable in the event you prefer to not owe taxes or limit your mortgage payments. If you’ll be able to get your withholding rate accurately estimated, you could give you the option to higher spend the cash coming into your checking account because it’s all yours and there isn’t any tax liability.
The alternative is yours
Many retirees shouldn’t have sufficient tax withholdings by default. Therefore, quarterly tax payments are common at this stage of life. However, tax liability doesn’t must be a given if you wish to increase your optional withholding tax.
