Retirees: Don’t Miss Out On This Tax-Saving Opportunity From Age 60 to 70
Friday, February 16, 2024
Retirees: Don’t Miss Out On This Tax-Saving Opportunity From Age 60 to 70
Friday, February 16, 2024
Mitch Zaba
There is a short window of opportunity from the day you retire to age 70 that retirees can exploit tax-saving strategies.
Yet only 1% of Canadians actually do so.
Not many Canadians are aware of the sneaky death tax you have to pay on your RRSPs and defined contribution pensions.
When the last of you and your spouse die, 100% of the value in these accounts has to be claimed as income for that year.
If you die with $500,000 left in your pension, you will pay the government as if you made $500,000 that year.
Which in some provinces is a $240,000 cheque to CRA.
Son of biscuit.
So what can you do?
One modern strategy to employ is NOT taking CPP until age 70
According to a report by the National Institute of Aging, only 1% of Canadians defer their Canada Pension Plan benefits beyond age 65.
Even when the benefits gained are substantial.
Just recently I created a financial plan where the client could take $740/month at age 60 or $1900/month at age 70.
To me, that seems like a no-brainer.
And it wasn’t even the best part.
Even after we were able to add $1,200/month (guaranteed) to this person's retirement by simply waiting, we also ELIMINATED their RRSP tax liability.
How?
By supplementing their income from age 60 to 70 with RRSP money.
Frankly, there wasn’t a lot saved to begin with.
But nevertheless, the opportunity to pay this person an extra $1,200/month was too good to pass up.
Does it work if you have a million dollars in your pension?
Yes.
What you end up getting is a faster draw down of your pension in the early years of retirement followed by two decades of increased stability.
You can see that in this particular scenario the client will spend more of their savings up to age 70.
Afterwards, their savings will stabilize because CPP benefits will kick in and they will need less of their retirement savings to live.
Resulting in less taxes paid, more guaranteed income, and increased protection from inflation and market crashes.
A bonus strategy we could apply is take excess RRSP money and redirect it to a TFSA
This scenario works when clients don’t plan on spending all of their retirement savings.
In this case, we would maintain or increase their RRSP withdrawals and contribute that money back to their TFSA.
This does two things:
- First, it protects future investment growth from taxes.
- Second, it eliminates the sneaky death tax you have to pay because TFSA savings are non-taxable.
Often, this strategy adds hundreds of thousands of dollars to our clients estate strategies while saving them tax during retirement.
A win-win scenario.
There is one BIG caveat to this strategy.
That is your health and your family’s health history.
We have clients that have family histories that are the poorest of luck. As in it would be a Christmas miracle if they lived past age 75.
In this case this strategy wouldn’t work as well because of the lost CPP benefits.
Therefore, use this strategy when optimistic about your longevity because age 75 is easily attainable for most.
As with anything, financial plans are highly customizable to the individual. It’s best to sit down with a professional to discuss various tax-saving strategies. If done correctly, you can spend more money in retirement by paying less in tax. Easier said than done.
Hi, I Am Mitch Zaba
Over the past 10+ years, we've worked closely with clients showing them how to grow their wealth, pay less taxes and how to create predictable passive income in the stock market.
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