Retirement Income
You know you should have a financial plan for your
retirement. But does your plan include income from a variety of sources? If not,
it should.
Many believe that public sources of retirement income, such as government
pensions, will not provide enough retirement income for them to live on. So they
must have other sources of retirement income to rely on.
"You should also have a variety of sources of retirement income because it
allows you to tax plan in retirement," says Chartered Accountant Hazen
Henderson, a Registered Representative with Assante Capital Management Ltd. in
Whitby. "Proper tax planning in retirement permits you to qualify for the age
exemption tax credit and avoid the clawback of the Old Age Security benefit.
Government retirement income includes the Canada Pension Plan (CPP) and the Old
Age Security (OAS) benefit. The CPP, which is fully taxable, can start at age
60, providing you have retired. Most begin taking the CPP at age 65 and it must
be taken by age 70. The OAS, also fully taxable, begins at age 65. Those with a
net income of more than $62,144 in 2006 are required to repay all or part of the
maximum OAS amount," explains Henderson.
Retired individuals on modest incomes may also qualify for various tax credits,
such as the Goods and Services Tax (GST) credit and the Ontario sales and
property tax credit, which are not taxed as income.
Seniors on limited incomes are eligible for the Guaranteed Income Supplement
(GIS), which begins at age 65 and is not taxable. Henderson notes that a recent
Statistics Canada survey found that 200,000 seniors who were eligible for the
GIS did not apply for it. "It's a mistake that costs this group collectively
about $300 million a year."
Non-government sources of retirement income include retirement savings plans,
such as Registered Retirement Savings Plans (RRSPs) and Registered Retirement
Income Funds (RRIFs).
"RRSPs permit individuals, perhaps with employer assistance, to contribute
pre-tax earnings into savings that appreciate on a tax-deferred basis until the
funds are withdrawn, hopefully in the retirement years," says Chartered
Accountant Dorete Astroff, a Senior Tax Manager with Soberman LLP in Toronto.
"Other non-government sources of retirement funds include other savings held
outside tax-deferred retirement savings plans and the sale of a principal
residence."
Money in your RRSP must be converted to a RRIF or annuity by December 31 in the
year you turn 69. Withdrawals from your RRIF must start in the year you turn 70.
Funds from these plans are generally taxed when the funds are withdrawn.
"Interest and dividends from savings held outside tax-deferred plans are
generally taxed when you receive them, although interest can be taxed on an
accrual basis in certain cases," explains Astroff. "The appreciation realized
from the sale of a house may not be subject to capital gains tax if it qualifies
for the principal residence exemption. Your Chartered Accountant can help you
determine whether the sale of your principal residence is completely or
partially tax exempt."
What can you do to maximize your retirement income from the various available
sources? The key is developing a sound financial plan for retirement.
"Planning for retirement is a long-term project and, unfortunately, many
Canadians are not planning properly for their retirement," cautions Henderson.
"You need to get a written financial plan in place and it's never too early to
start. Current retirees who indicate the most enjoyment of their retirement,
planned for it for more than 20 years."
"A CA will work with you to develop your plan for a comfortable retirement,"
explains Henderson. "A CA will also make sure you obtain the maximum benefit
from tax credits, take advantage of opportunities to avoid the OAS clawback and
receive the maximum amount from the GIS."
For more information contact a Chartered Accountant.
Brought to you by the Institute of Chartered Accountants of Ontario.