However, this tax credit is not an enormous deal for most individuals, and in some cases it’s higher to not convert an RRSP or LIRA into an RRIF or LIF with a view to qualify for the tax credit.
In 2025, the utmost federal tax savings is $290 (read on for my calculations). If you are taking the provincial loan, you’ll be able to save somewhat more because it varies depending on the province. In Ontario, the extra tax savings is $89. This means the entire tax savings for all Ontario residents is $379, assuming they pay no less than $379 in taxes. If you can’t use the complete balance, you’ll be able to transfer the quantity you can’t use to your spouse.
Be aware of the brand new tax rate
As a reader, Sylvain, you could have read that the utmost federal tax savings is $300, not the $290 mentioned above. That was the case in previous years, but the bottom federal tax rate was reduced from 15% to 14% this yr. The tariff didn’t come into force until the tip of June or the center of the yr. Therefore, the bottom federal tax rate and pension tax credit for 2025 is 14.5%. Next yr each shall be 14%.
Also note that claiming the $2,000 retirement tax credit will not be a method to get $2,000 tax-free out of your RRIF/LIF, which is what I often hear. Well, that is almost the case when you’re in the bottom tax bracket.
Count on the retirement tax credit
Think about how the tax credit works. The $2,000 federal tax credit applies a tax rate of 14.5% and the tax savings is $2,000 x 14.5% = $290. A rate of 5.05% is applied to the $1,762 Ontario credit, leading to a tax savings of $1,762 x 5.05% = $89. Both together lead to a tax savings of $379.
Now take into consideration what happens when you withdraw $2,000 from an RRIF or LIF. If you are in the bottom tax bracket in Ontario, with a marginal tax rate of 19.55% (14.5% federal + 5.05% provincial), you will pay $2,000 x 19.55% = $391 in taxes. If you apply the $379 retirement tax credit savings, you will find yourself paying only $12 in taxes on the $2,000 withdrawal. If Ontario’s pension tax credit had been $2,000 as an alternative of $1,762, it could have been a bust with no tax liability.
The situation is different for an individual in the best tax bracket with a marginal tax rate of 53.53%. A $2,000 RRIF or LIF withdrawal leads to a tax bill of $1,070 before the credit is applied and a tax bill of $681 after the retirement tax savings of $379. An individual with income of about $100,000 can have to pay about $240 in taxes after claiming the credit.
This results in the subsequent query for the one that only receives the $2,000 to receive the retirement tax credit. Does it make sense to withdraw the cash and reinvest the smaller amount after taxes, or wouldn’t it be higher to depart the whole $2,000 within the RRIF or LIF to grow? This becomes a planning issue. What are your spending and gifting plans?
The article continues below promoting
X
What the pension tax deduction is nice for
Have I thrown enough math at you, Sylvain? You’re right to take into consideration easy methods to minimize your tax liability, and there are occasions when you’ll be able to claim the pension tax credit before you switch 65.
The most typical method to claim the pension tax credit before the age of 65 is to take life annuity income from superannuation or employer pension plans. You can claim the credit even when you are under age 65 and receiving retirement advantages as a result of the death of a spouse who was eligible for the retirement tax credit. In other words, in case your spouse is over 65 and receives RRIF after which dies, you’ll be able to claim the retirement tax credit on that continued income even when you aren’t yet 65.
Another good thing about the retirement tax credit is the power to separate retirement income. If you might have an outlined profit pension plan, you’ll be able to share your retirement income together with your spouse before age 65. In this case, you’ll be able to each claim the pension tax credit, even when you are each under 65. The same applies to RRIF or LIF income after age 65, provided you’re each 65 or older. Instead of claiming a $2,000 retirement tax credit, you’ll be able to each claim the $2,000 tax credit. Two credits for one pension!
Thanks to your query, Sylvain. Some people robotically convert RRSPs or LIRAs to RRIFs or LIFs to qualify for the retirement tax credit without really excited about it.
Do you might have an issue about your personal funds? Submit it here.
Read more about retirement planning:
