How do I pay less taxes in retirement?
This is a question that is on the mind of many retirees. After all, income taxes may very well be one of our largest expenses in retirement. In this video I am going to explain income splitting and its effect on averaging down your retirement tax bill and leaving more money in your pocket so you can enjoy your retirement.
If we haven’t met yet, my name is Mark Walhout, I run an investment advisory and financial planning business called Walhout Financial. I help people with retirement and I created this channel to share ideas and concepts that I use to help people with retirement every single day. If you want to get more videos like these, hit the subscribe button and the bell icon so you are alerted when new videos are posted. If you like this video give it a thumbs up and leave your questions and comments below.
Take a couple – one member of the couple has $0 income. The other member works and earns $120,000. Taxes for member 1 were $0. Taxes for member 2 are just under $25,000.
Take another couple – Same total income, but split evenly $60,000 each. Their income tax bill would be closer to $8,500 each or $17,000 total. That’s a difference of about $7,000 on the same gross income.
The bad news is, we cannot split employment income. But the good news for retirees is that there are certain types of income that we CAN split while we are retired to achieve this effect of “evening out the buckets” and averaging down our tax bills.
- Pension income – if you have a workplace pension, you can split certain types of pension income with your spouse:
- The actual payments continue to go to you but you can effectively send up to 50% of that income to your spouse when you complete your income tax return
- If the payments are lifetime payments from a registered pension plan, this splitting can be done even if the pensioner is under age 65.
- RRIF/LIF/LRIF income – withdrawals from these types of accounts can be split with your spouse/common law partner as long as the account holder is over the age of 65
- CPP Income – CPP income can effectively be split with your spouse/common law partner provided that they are both over age 60
- Technically this is called CPP sharing, where each member of the couple can share up to 50% of their CPP retirement benefit
- Split is determined by the number of years the couple lived together while they were contributing to the CPP program
Common misconceptions – there are some sources of retirement income that can’t be split, these include:
- Lump sum RRSP withdrawals
- Capital gains, dividends, and interest
Call to Action
One of your largest ongoing expenses in retirement will likely be income taxes. The good news is that the ITA provides us with some tools to help us manage our tax bills down throughout retirement. Income splitting is one of the best ones. If you want to understand more about how to maximize income splitting to lower your tax bill, speak with your advisor or set up some time with me using the link in the description below and we can have a discussion about it.
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