This is a tax-efficient technique to withdraw funds from Registered Retirement Savings Plans (RRSPs). “To make this even more tax efficient, the withdrawal amount should first be transferred to a (registered superannuation fund) RRIF,” says Ardrey. After age 65, this step generates the retirement tax credit, and if a pair has different RRSP/RRIF account sizes, “the income may be divided between the spouses.”
If CPP and OAS are each postponed to 70, payouts shall be 42% and 36% higher, respectively, allowing for higher pension payments for the remaining of a taxpayer’s life, Ardrey says. This also reduces future RRIF payments, “increasing the likelihood that OAS will not be recovered.”
Dividend tax credits
Canadian retirees can take additional advantage of the tax brackets by receiving eligible Canadian dividends of their taxable investment accounts. Ontario taxpayers can receive actual (not grossed up) dividend income of $57,375 and, in the event that they haven’t any other income, will receive that quantity with none tax liability, says Ardrey. And “if two spouses can use the same strategy, that’s almost $115,000 in tax-free income.”
However, take note that eligible Canadian dividends shall be “grossed up” by 1.38 on the tax return. It is that this extrapolated amount – not the actual dividend originally received – that impacts the calculation of the OAS clawback. Ardrey estimates that the OAS clawback will kick in on roughly $66,000 in dividend income. Retirees need to think about find out how to mix this income with other income resembling CPP.
Ulmer says that while the income level at which OAS is claimed back is identical for everybody, the OAS cap isn’t the identical for everybody.
“Once an OAS recipient has pushed their OAS past 65, the cap gradually increases,” she says. “This depends on how the clawback works – 15 cents on the dollar. If there is more OAS then there is more headroom before the 15% clawback eats it all up.” She adds that the OAS cap depends on when you start collecting: “So procrastination can happen for that alone Reason being a good strategy – you may be able to keep more of your OAS if you have a high income in retirement.”
Allan Small, senior investment advisor at Toronto-based IA Private Wealth and a MoneyDown columnist, says that while investment strategies are specific to individuals, he’s beginning to see some investors move away from RRSP investing.
Some imagine that if a tax deduction isn’t obligatory, they “would rather top up the TFSA instead.” The money grows tax-deferred, like an RRSP, but you pay no taxes when money is withdrawn from this account.”
