Essential Tax-Saving Strategies for a Lasting Retirement

For you to draw a consistent paycheque from your investments, your financial plan needs to address investment management, a withdrawal plan, government benefits, and your estate. Taxation impacts each of these components, but if we work to coordinate them and uncover potential tax savings, your money can truly last a lifetime. Strategies that minimize taxes will enhance the overall efficiency of your financial plan, enabling you to keep more of your wealth. Let’s dive into the top strategies you should consider to save on taxes throughout retirement.

Tax-Efficient Investment Strategies

Although our first considerations when we review your investments are your risk tolerance and objectives, taxation has an increasing impact over a longer timeframe. One essential tactic is asset location, where you hold investments in different account types based on how they are taxed. For example, by using both an RRSP and TFSA, you will have more control over how much of your retirement income is taxable. If you hold investments outside of registered accounts, the interest income, dividend income, or capital gains they produce will each be taxed differently. If you focus on earning capital gains, you have more control over when they become taxable, by choosing which investments to sell and when. You can use tax-loss harvesting, which means selling at a loss to reinvest in a similar investment, thereby offsetting other taxable capital gains. Each of these strategies can increase the tax efficiency of your investments and help you retain more of your wealth.

Tax-Conscious Withdrawal Strategies

Receiving a paycheque from your employer is relatively straightforward, but in retirement, you have more choice and control over the sources of your income. Withdrawals from an RRSP or other registered account are fully taxable, whereas non-registered account withdrawals may be fully or partially taxable, and TFSA withdrawals are non-taxable. A prescribed annuity can be used to smooth your tax obligation over your lifetime. And shifting your perspective from your annual tax bill to your lifetime tax bill can result in paying less tax in total, even if you pay more in a single year. For example, you could benefit from an RRSP exit plan to pay taxes in your lower tax brackets during your lifetime, rather than in the highest tax bracket at the end of your life. By taking a longer perspective, you can plan to pay less taxes over your lifetime and preserve more wealth for your loved ones.

Coordinating Taxation with Government Benefits

We aim to understand the tax system and make choices that reduce your tax obligation. For example, there are ways that you can qualify for the pension amount, even if you don’t receive a pension from your employer. Once you start to receive CPP and OAS, they are both taxable so they should be coordinated with other taxable and non-taxable sources of income to optimize your lifetime tax bill. Old Age Security can be clawed back if you receive too much net income. Being aware of how different sources of income affect your net taxable income, especially dividends that are grossed up, is essential to maximizing your guaranteed income from government benefits. Less taxes and more government benefits results in greater lifetime income.

Tax-Smart Estate Planning

While it feels good to reduce your tax bill this year, it’s financially more advantageous to minimize the taxes you pay over your lifetime. People who don’t run out of money will leave an inheritance for their beneficiaries. The most basic step is to ensure that your assets will transfer tax-free to your spouse. But when there is no surviving spouse, your assets can be distributed between beneficiaries, who are often family members that you name, and possibly causes that you care about. The timing and method of transfer can reduce the final tax bill. Sometimes the estate contains illiquid assets, for example, a cabin or a business, but has little cash. To avoid selling the asset to pay the taxes, life insurance can be used to pre-fund the estimated tax bill, keeping the estate intact. Implementing tax-smart strategies within your estate plan can help reduce the tax burden and provide a smoother transfer of wealth to your beneficiaries.

By integrating tax considerations into every aspect of your financial plan, including tax-efficient investment management, adopting a tax-conscious approach to withdrawals, coordinating government benefits, and employing tax-smart estate planning, you strengthen your financial foundation, optimize your assets, and lay the groundwork for lifelong wealth for you and for your beneficiaries. When you are confident that the crucial parts of your financial plan are optimized for taxes, you can enjoy your retirement without worrying about money.

You can read more articles about tax-efficient strategies and other financial topics. If you have questions about this article or would like a conversation about how these ideas apply to your unique situation, call us at 403-290-0940.