Join Fund Library now and get free access to personalized features to help you manage your investments.
It’s tax filing season but smart taxpayers will turn this into tax planning season, too. The key question for couples working with tax specialists: how do we maximize our retirement income potential? There are three specific goals to consider.
1. Make sure you receive adequate pension and investment income. To increase and then sustain your required cash flow in retirement, be precise on exactly how much money is needed – after accounting for inflation and taxes to cover budgeted costs. These may be the increased cost of medical expenses, heating or gasoline costs, or tax hikes, for example.
2. Continue to grow asset pools. Exactly how much will need to be saved to meet those budgeted needs? Socking money away now, preferably on a tax exempt, tax-reduced, or tax-deferred basis, will help you to meet planned and unanticipated spending needs adequately, without too much interference by increasing taxation. Tax time is a good time to “pay it forward” into the right savings accounts. Advisors can help to make that task more relevant by simulating the retirement income results today’s savings would bring. To do so, ensure pre-retiree clients understand what today’s personal net worth is – and what it needs to be – to meet their goals.
3. Dodge expensive fees. It’s always important to reduce the costs related to borrowing or investing in order to increase returns on capital. Debt servicing costs, financial management and investment fees, legal fees and accounting fees require annual review and projection over the retirement savings period to make the right investment decisions.
These are the three secrets to success in saving enough money – after taxes, inflation and fees – to fund an adequate retirement. The annual tax filing visit with advisors can be so much more than a compliance exercise, when highly motivated clients and advisors join forces.
The success of the process, however, is also very much dependent upon behavioral finance. Younger investors must have the discipline to actually save the money, and older investors must make it their business to withdraw funds knowledgeably – that is, with their after-tax results in mind.
For older investors, there are a few additional tax tips to consider in order to minimize tax and maximize cash flow. The federal government has provided several tax breaks that help today’s retirees increase their after-tax receipts from retirement savings. Advisors and clients should be sure to discuss them this tax filing season.
Pension splitting. Pension income splitting with your spouse which was introduced in 2007, allows you to save income tax due when one spouse is in a lower tax bracket than the other. Essentially, income that qualifies for the $2,000 federal pension income amount qualifies for pension income splitting. Up to one-half of such pension income received can be reported by the recipient’s spouse by making an annual election to do so on CRA Form T1032.
Tax-Free Savings Account (TFSA). Introduced in 2009, the TFSA provide retirees with the opportunities to develop winning tax-exempt strategies for their capital. Since the biggest single expense in retirement is usually tax, high-income retirees should strive to use TFSAs to their maximum potential every year. Currently a maximum of $63,500 in unused TFSA room is available to each adult resident of Canada. This account also works well for retirees in general because unlike RRIFs, TFSA’s generate no taxable income on withdrawals or re-investment. As well, income accumulating in TFSAs do not trigger clawbacks of Old Age Security or Guaranteed Income Supplement.
Excerpted from Essential Tax Facts by Evelyn Jacks, 2018 edition.
© 2019 The Knowledge Bureau, Inc. All rights reserved. Reprinted with permission.
Evelyn Jacks is the founder and President of Knowledge Bureau, which brings continuing financial education in the multiple areas of specialization to advisors and their clients. She is the author of 52 books on tax and wealth planning. This article originally appeared in the Knowledge Bureau Report. Follow Evelyn Jacks on Twitter @EvelynJacks. Visit her blog at www.evelynjacks.com.
Notes and Disclaimer
The foregoing is for general information purposes only and is the opinion of the writer. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
Join Fund Library now and get free access to personalized features to help you manage your investments.
Fund Library
