Wasseem Dirani on Understanding Taxes in Retirement
Achieving a comfortable retirement is a goal that most of us have. However, what few people realize is that retirement planning isn’t just about saving. Rather, we must think about how to turn our savings into as much retirement income as possible and a lot of that comes down to taxes as you are still required to pay them in your golden years. Thus, in order to maximize your savings, it’s important to think strategically about taxation in retirement. Not sure where to start?
Wasseem Dirani of Hamilton, Ontario, the CEO of Taxes To Save and a seasoned tax expert, provides his insight into the topic of understanding taxes in retirement. He also outlines a few key tips for minimizing the taxes you owe.
Taxable Retirement Income
First thing’s first: in order to understand how to minimize the taxes you pay in retirement, you must first understand which types of retirement income are subject to taxes. Wasseem Dirani shares that just like employment income, most retirement income is taxable. This includes Old Age Security (OAS), Canada Pension Plan (CPP), other company pension payments, and income from annuities and registered retirement income funds. However, one area that isn’t taxable are withdrawals from your tax-free savings account. When you turn 71, you will no longer be able to use your registered retirement savings plan contributions to reduce your tax bill.
Paying Taxes in Retirement
Regarding actually paying your taxes in retirement, Wasseem Dirani notes that it can be slightly more complicated than when you were employed. Unlike when you were an employee and received paychecks with the tax already deducted, paying taxes as a retiree isn’t quite as straightforward. You will have a few different options for paying your taxes. The first option is to have the income tax come off your company pension, CPP, or OAS. The second option is to pay tax on the income earned from investments, rentals, self-employment, or other pension payments in regular installments. The third option is to wait until you file your tax return to see how much you owe. However, if you choose to go this route and you owe more than $3,000 in federal income tax, the CRA will require you to pay tax in installments.
Wasseem Dirani on Strategies for Paying Taxes in Retirement
As the CEO of Taxes To Save, Wasseem Dirani knows a thing or two about tax strategies. He provides a few pieces of advice for retirees who are looking to minimize the amount of income tax they have to pay each year. His first piece of advice? Hire an expert to help you. Tax experts such as himself are the best place to start when curating a plan for your taxes. Dirani claims that most people have several sources of retirement income, ranging from CPP to RRIFs. In order to minimize the amount of tax you pay, it is recommended that you not only plan the order in which you draw from your different income sources, but that you plan how much you’ll take from each source. A professional advisor can run the numbers on your behalf and come up with the most beneficial withdrawal scenario for you.
The second strategy is splitting your pension income. Couples are able to split up to 50% of their eligible pension income between them, as long as the sender is at least 65 years of age. This is an excellent strategy if one partner has a significantly higher income than the other. Another strategy is to take advantage of tax breaks. Taking advantage of all tax breaks and credits available to you is something that the general population should always be doing. However, there are different tax breaks that retirees are eligible for, so it’s important to know what they are. One example is the pension income amount, which is a credit you might be eligible for if you received pension or annuity payments from someplace other than your CPP or OAS. Taking advantage of this credit can save you up to $300 on your tax return. Other similar tax breaks you may be eligible for include the disability tax credit, the medical expense tax credit, the home amount, and the home accessibility tax credit.