Saving for retirement in Canada isn’t just about setting money aside. It’s about building a tax-efficient retirement strategy that helps your savings grow and keeps your tax bill low. Whether you’re a high earner nearing retirement or just starting out, understanding how retirement planning in Canada works, especially when it comes to minimizing taxes, can make a significant difference in your long-term financial security.
In this article, we’ll explore the most effective ways to minimize taxes in retirement, including how to use a registered retirement savings plan (RRSP), tax-free savings account (TFSA), Canadian Pension Plan (CPP) income strategies, and pension income splitting to your advantage. With the right plan, you can retire with confidence and keep more of your money working for you.
RRSP (registered retirement savings plan)
You can use RRSPs to defer taxes while you’re working and earning more.
- What it is: You contribute pre-tax income (reducing your taxable income today)
- Taxation: You pay tax when you withdraw the money in retirement
- Best for: High earners who expect to be in a lower tax bracket when you retire
TFSA (tax-free savings account)
You can use a TFSA for flexible withdrawals in retirement that won’t bump up your income tax.
- What it is: You contribute after-tax income
- Taxation: No tax on growth or withdrawals
- Best for: Anyone! Especially useful in retirement when you want tax-free income.
In addition to the accounts you control, it’s important to consider government retirement benefits. These form the foundation of most Canadians’ retirement income and can affect how you plan withdrawals. Canadians are funded by CPP which is funded through your pay cheques while you’re working. You can start collecting CPP between age 60 and 70.
Canadians can also access Old Age Security (OAS) starting at age 65, but if your income is too high in retirement ($90,000 plus) some or all of your OAS may be clawed back. Keeping your taxable income lower using TFSA withdrawals can help avoid OAS clawbacks.
Diversify your income sources
Having a mix of income sources allows you to control how much tax you pay each year by deciding where to pull money from. In retirement, the aim is to have income from multiple sources:
- RRSP/RRIF (taxable)
- TFSA (non-taxable)
- CPP/OAS (taxable)
- Non-registered investments (partially taxable)
- Possibly a pension or business income
RRSP and other contributions
RRSP: Maxing out your RRSP in high-income years reduces your taxes today and defers those to retirement, allowing you to save more and pay those taxes when you withdraw the money in retirement. This is best for high earners who expect to be in a lower tax bracket once you retire.
TFSA: Any money earned inside a TFSA isn’t taxable, even if you withdraw it, some may be better to hold retirement assets in a TFSA (up to your annual contribution limits) rather than a non-registered account. TFSA’s are a place to park your money but don’t have a use for, or as an emergency fund for unexpected expenses.
Convert your RRSP to RRIF by age 71: By December 31 of the year you turn 71 you must convert your RRSP into an RRIF (registered retirement income fund) or purchase an annuity. You’ll then be required to take minimum withdrawals every year, withdrawals are taxable income. If you start small withdrawals from your RRSP in your 60’s you can avoid big tax bills in your 70’s.
Pension income splitting
Once you are 65 or older, you can split eligible pension income with a spouse (up to 50%). This can reduce your combined taxes if one spouse has a much higher income. This also applies to RRIF income after age 65.
Remember to use non-registered investments strategically. These accounts aren’t tax sheltered but you get preferential tax treatment on capital gains (only 50% is taxable) and eligible dividends (tax credit applies).
Final thoughts
A CPA can help you plan for retirement and navigate your finances. If you’re unsure of where to start or how you can diversify more effectively, a CPA is there to help.
Tax rules can be complex. This article is not intended as tax advice, and you should not make tax decisions based solely on the information presented. You should seek the advice of a chartered professional accountant before implementing a tax plan or taking a tax filing position.
Originally published by RHN Chartered Professional Accountants.
