For Canadian investors nearing or entering retirement, many factors are at play when it comes to thinking about how to plan for their golden years.
From how much one has invested in their retirement accounts (and what their ultimate spending goals are) to maximizing the benefits one receives when the time comes, there are a number of factors that are important to consider.
In this piece, I’m going to highlight how much one’s investment income can affect government benefits. For those with retirement portfolios to draw on, here are a few key factors to consider when planning out how much to take over time.
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Consider types of investment income
For those receiving Old Age Security, guaranteed income supplement, employment insurance, Canada child benefits, or other benefits, the types of investment income matter when it comes to taxation.
For interest income (income generated from certificates of deposit, high-interest savings accounts, etc.), that income will be taxed at one’s highest rate. This is the least tax-efficient way to generate passive income in retirement.
For those living off of dividend income from stock holdings, this is more tax-efficient due to the dividend tax credit. However, overall income will be taxed at one’s marginal rate (less the credit), so that’s something to consider.
However, selling stocks with capital gains may be the most tax-efficient route for most investors. Gains are taxed at 50% for the first $250,000, with anything over and above this threshold in a fiscal year taxed at two-thirds.
Consider which types of accounts one invests in
For those looking to truly maximize their tax outlays, pulling money from specific accounts can play a big role in how much tax one will pay.
For those pulling capital from a Tax-Free Savings Account (TFSA), distributions are tax-free. Much like a Roth IRA in the U.S., these accounts allow retirees to pull out everything they’ve put in (plus gains) free of tax. For those with long-term holdings in such accounts, the benefits can be massive.
The next best option is to pull capital from one’s Registered Retirement Savings Plan (RRSP). Distributions are taxed at one’s marginal rate, though there are required distributions over time that investors need to be aware of.
And for those who have done their due diligence and built up a substantial brokerage account, pulling funds from such an account should be the last priority. That’s because any income generated from such a portfolio will be considered fully taxable.
Bottom line
I think having a mix of all three accounts makes the most sense for those able to swing it. But for younger investors looking to plan for retirement, maximizing one’s TFSA first and then RRSP to maximize near-term tax savings is likely the best option.
