The tax burden in retirement is lighter than during the working years in some important ways. As a result, less total income is required during retirement to maintain a comfortable lifestyle than many people expect. Here are some key factors that can impact expenses and taxes in favour of retirees.
Expenses often decline
- Payroll deductions, such as contributions to Employment Insurance (EI), Canada Pension Plan (CPP) and union dues end when employment ends. CPP and Old Age Security (OAS) then become net benefits, although both are taxable, and OAS is subject to a claw back above incomes of approximately $75,000.
- Pre-retirement budgets often include mortgage payments that come to an end, either through making the final monthly payment, or through a downsizing that pays off the mortgage.
- The financial cost of children generally subsides as they become adults, but not in all cases.
Tax breaks take effect
- The age amount enables you to earn an additional $7,225 before federal tax kicks in, and while this is means tested, individual earnings need to exceed $84,597 before the age amount is lost.
- There is also a small credit called the pension amount, which enables a further $2,000 at the federal level, and $1,000 at the provincial level, to be earned.. Qualified pension income is required to claim this credit. CPP and OAS do not count, but a company pension qualifies, as do withdrawals from a RRIF for those 65 and older.
- Those over 65 who are still working can move $2000 per year to a RRIF while keeping the rest of their RRSP intact, and claim the pension amount. Splitting pension income can also enable a spouse to qualify for the credit.
- Income splitting for those who are 65+ can be very beneficial if one spouse would otherwise have a significantly larger pension than the other.
- TFSAs are becoming increasingly important for retirement, as couples have been able to contribute over $100,000 between them. The combination of future contributions and investment growth saves thousands of dollars in tax, plus it helps to avoid OAS claw back.
- Lightly taxed investment options can also result in lower taxation for retirees than for workers. Capital gains, dividend income.
If you would like to further explore how this information applies to your retirement scenario, feel free to call or set up a meeting to discuss your personal context. You may be pleasantly surprised to learn that your financial outlook in retirement looks better than you thought.