Retirement Planning: 6 Strategies to Reduce Your RRIF Tax Liability

When you have a Registered Retirement Income Fund (RRIF), you're required to make a minimum annual withdrawal, and the percentage is based on your age. The percentage increases each year, and every withdrawal is taxed as regular income. This article will provide you with six effective strategies to reduce your RRIF tax liability.

1. Use your younger spouse's age

Establishing your RRIF based on your younger spouse's age is an effective strategy. This approach locks in a lower minimum payment, which reduces your annual tax bill.

2. Split RRIF income

RRIF income qualifies as eligible pension income for pension income splitting. If you're 65 or older, you can split up to 50% of your RRIF income with your lower-income spouse. This will reduce your combined tax bill.

3. Trigger the pension income tax credit

Triggering the pension income tax credit is another effective strategy. At age 65, you can open a RRIF and transfer enough Registered Retirement Savings Plan (RRSP) funds to enable you to withdraw $2,000 from your RRIF each year from ages 65 to 71. The $2,000 withdrawal qualifies as pension income, triggering an annual 15% credit on your tax return.

4. Customize withdrawal amounts

Customizing the amount of annual RRIF withdrawals that best suits your situation depends on several factors. These factors include your other income sources, age, marital status, tax situation, and other factors. It's essential to work with your advisor to plan your withdrawals effectively.

5. Plan initial spousal RRIF withdrawals

Planning your initial spousal RRIF withdrawals is essential if you've contributed to a spousal RRSP in the year of the withdrawal or during the previous two calendar years. Payments up to the minimum RRIF withdrawal amount are taxable to the lower-income spouse, but any payments exceeding this amount would be taxable to the contributor.

6. Use your Tax-Free Savings Account (TFSA)

If you don't need the minimum RRIF amount to support your retirement right away, you can contribute the funds to your Tax-Free Savings Account (TFSA), provided you have contribution room. Even though you pay tax on the withdrawal, the funds can now grow in a tax-free environment.

In conclusion, there are several effective strategies you can use to minimize the impact of the tax liability on your RRIF withdrawals. Work with your advisor to determine which strategy is best for your needs and financial goals. With the right planning and execution, you can reduce your RRIF tax liability and maximize your retirement savings.

Jim Thornton, CLU

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About the Author

Jim Thornton is a Financial Planner with Assante Capital Management Ltd. Please contact him at (519) 752-3155 to discuss your particular circumstances prior to acting on the information above.

Assante Capital Management Ltd. is a Member of the Canadian Investor Protection Fund and Investment Industry Regulatory Organization of Canada. Insurance products and services are provided through Assante Estate and Insurance Services Inc.

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