Canadians looking to make millions in retirement have likely already opened a Registered Retirement Savings Plan (RRSP). And if so, good for you! You might even be contributing to it regularly, making investments as you go. This is certainly a great start.
But if you start later in life, it can be quite difficult to make it to millions in a short period of time. This is why today, we’re going to look at three secrets you’re not likely to have heard about when it comes to becoming an RRSP millionaire.
Income splitting
If you’re married or even common-law, retirement income splitting is a tax strategy that you should certainly consider. The strategy is designed to reduce their overall tax burden in retirement. It allows couples to effectively shift a portion of their retirement income from the higher-earning spouse to the lower-earning spouse, potentially resulting in significant tax savings.
Retirement income splitting applies to certain types of eligible pension income, including income from Registered Pension Plans (RPPs), annuities, Registered Retirement Income Funds (RRIFs), and certain periodic payments from an RRSP.
By splitting pension income, couples can potentially reduce their overall tax liability because the income is taxed at the lower-income spouse’s marginal tax rate. This can be particularly beneficial if one spouse has a significantly higher income than the other.
Spousal RRSPs
Another benefit if you’re married or common law is having a spousal RRSP. Again, this can be a valuable tool for income splitting in retirement and can help couples optimize their retirement savings and tax-planning strategies. It allows higher-income spouses to contribute to an RRSP in the name of their lower-income spouse.
Why would you want to do that? These contributions are deducted from the higher-income spouse’s taxable income, providing an immediate tax benefit. Spousal RRSPs can be particularly beneficial in situations where there is a significant income disparity between spouses or where one spouse is likely to have a higher income in retirement due to pension or other sources of income. By equalizing retirement income through spousal RRSP contributions, couples can minimize their overall tax burden in retirement and maximize after-tax income.
One important consideration with spousal RRSPs is the tax-attribution rule. This rule stipulates that if funds are withdrawn from a spousal RRSP within three years of the contribution being made, the withdrawal is attributed back to the contributing spouse for tax purposes. This prevents the higher-income spouse from simply shifting income to the lower-income spouse to avoid taxes. However, after the three-year period has elapsed, withdrawals are taxed in the hands of the lower-income spouse.
Diversify investments
Yet, we all know to diversify our investments. However, millionaires usually take this to a whole other level with the guidance of their financial advisors. They’ll choose stocks for long-term growth, bonds offering fixed-income and capital preservation, and other alternative investments that might even include venture capitalism.
The closer they get, the more growth they’ll need. In this case, retirees might focus on generating retirement income rather than aggressive growth. And a great place to look at ones that offer a mix of bonds and equities with a focus on dividend income that can be reinvested.
A great option is an exchange-traded fund (ETF) such as BMO Balanced ETF (TSX: ZBAL). This offers literally a balanced approach, with 40% fixed income and 60% invested in equities. It holds a 2.37% yield, providing investors with long-term capital growth and income by investing in a diversified portfolio of equity and fixed-income securities. All in all, you’ll be generating income while having your portfolio balanced before and throughout retirement.
