Canada has a couple of retirement benefits to help residents lead a comfortable life during their old age. The Canada Pension Plan (CPP) and the Old Age Security (OAS) are two such retirement payouts. However, these payouts are taxed by the Canada Revenue Agency (CRA).
CPP is a pension plan that is not funded by the government. The employees and their respective employers make regular contributions to this plan from monthly paycheques. The OAS is a government payout.
In case your net income is over the threshold amount of $75,910 (for 2018), you will have to repay part of your OAS pension. The repayment is calculated based on the difference in the threshold amount and income for the year. The threshold amount for 2019 is $77,580, while for 2020 this figure stands at $79,054.
Similar to any other income, the CRA taxes your CPP and OAS payouts as well. Though retirees can offset some of these taxes by deductions, a portion of your pension benefits still manages to reach government coffers.
However, retires can reduce the amount of taxes they pay on the CPP and OAS benefits.
Max out your TFSA contribution
The Tax-Free Savings Account (TFSA) is a flexible investment option for Canadians. We know that withdrawals from the TSFA are not subject to tax. Investors can grow their wealth by capital gains and dividends and can withdraw it tax-free.
For example, in case you earn $500 a year in interest income from your TFSA savings, this income or any withdrawal from the account will not impact federal income-tested benefits. However, in case you earn $500 in a regular savings account, it would have to be included on your Income Tax and Benefit Return. Retirees would have to pay more tax as well as repay a part of the social benefits.
So, it makes perfect sense to max out your TFSA contribution. The contribution limit for investing in the TFSA this year is $6,000, while the total contribution limit is $69,500. So, where do you invest these funds?
One well-diversified Canadian ETF is iShares S&P/TSX 60 Index Fund (TSX:XIU). This fund provides investors exposure to Canada’s blue-chip companies. It is the largest and most liquid ETF in the country.
In the last year, the XIU is up 14.6%, while it has generated annual returns of 7.5% in the last three years, 6.9% in the last five years, and 7.7% in the last 10 years. XIU has maximum exposure to Canada’s financial sector at 36%, followed by energy, industrials, materials, and information technology at 17.7%, 10.3%, 9.7%, and 7.4%, respectively.
The top holding in the XIU is Royal Bank of Canada at 7.9%. The other top holdings include Toronto Dominion at 6.95%, Enbridge at 5.6%, Bank of Nova Scotia at 4.72%, and Canadian National Railway at 4.52%.
XIU has a distribution yield of 3.2%. This means if you invest $69,500 in this ETF, you can generate yearly dividends of $2,224 and can save far more in taxes.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of and recommends Canadian National Railway and Enbridge. The Motley Fool recommends BANK OF NOVA SCOTIA and Canadian National Railway. Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.