What to know about taxes in retirement

Not all income is taxed the same way

Money from the Canada Pension Plan, Old Age Security and workplace pensions is taxable income. So is money you withdraw from an RRSP or a RRIF, and it is added to your other income for the year.

Withdrawals from a Tax-Free Savings Account are not taxed and do not count as income, which makes it a very flexible place to keep money you may need in a hurry. Investments held outside registered accounts are taxed differently again: interest is fully taxable, while dividends and capital gains receive more favourable treatment.

The RRSP has a deadline

An RRSP has to be converted, usually to a RRIF or an annuity, by the end of the year you turn 71. A RRIF then has a minimum amount that must be withdrawn each year, based on your age. That money is taxable, whether or not you need it.

Some people start drawing on their RRSP earlier, in lower-income years, to smooth out their tax over time. It is a strategy that depends on your situation, and it is a good question for an adviser.

Ways to share and reduce

If you have a spouse or partner, some kinds of pension income can be split between you, which can lower the combined tax bill when one of you has a much higher income. There are also credits for age and for pension income that reduce the tax you pay.

Which credits and splitting rules apply depends on the kind of income and your age, and the details are on the Canada Revenue Agency’s website. It is worth asking whoever prepares your return whether you are using all of them.

When income gets high enough to matter

Old Age Security is reduced through a recovery tax once your net income passes a threshold that is set each year. A large one-time withdrawal, or the sale of an investment property, can push a single year’s income over it. Timing large transactions across years can make a real difference.

Where you live changes the bill

Provincial income tax is separate from federal tax, and the rates differ by province. Your province of residence at the end of the year is what counts, so a move can change your tax as well as your address.

This is general information, not tax advice. Tax rules change and personal situations differ, so treat this as a list of good questions to take to a professional.