As Canadians approach their retirement years, it becomes even more important to deal with the confusing situation of retirement planning with clarity and confidence. The method toward a comfortable and secure retirement is filled with many decisions and strategies that can significantly impact one’s financial future.
Retirement is a time for Canadians to relax, travel, and enjoy their golden years. However, it can also be daunting, especially if you’re not financially prepared. If you’re a Canadian approaching retirement, here are six hidden retirement secrets that you need to know:
1. Converting LIRA to RRSP
A locked-in retirement account (LIRA) holds pension funds until retirement. Converting LIRA funds to a Registered Retirement Savings Plan (RRSP) can be done without needing an available contribution room. This is especially advantageous because RRSP contribution limits are typically strict, and this conversion avoids those limitations.
When you convert your LIF to an RRSP or RIF, you don’t need any unused RSP contribution room. This means you can convert your entire LIF, even if you’ve already maxed out your RRSP contributions.
2. Differences Between OAS and CPP Start Times
OAS Automatic Enrollment: The Old Age Security (OAS) program provides a monthly payment to eligible seniors aged 65 and older. Many Canadians are automatically enrolled in OAS, receiving payments upon age 65. If you don’t need your OAS at 65, you can defer it until 70 to receive a higher monthly payment.
CPP Requires Application: Unlike OAS, the Canada Pension Plan (CPP) requires individuals to apply to start receiving benefits. CPP is not automatic and can be started at any time. You can start it as early as 60, but you’ll receive a lower monthly payment. You can also delay starting your CPP until 70 to receive a higher monthly payment.
3. Converting RRSP to RIFF or LIRA to LIF
When converting a Registered Retirement Savings Plan (RRSP) to a Retirement Income Fund (RIFF) or a Locked-in Retirement Account (LIRA) to a Life Income Fund (LIF), there is a flexibility element.
The payment amount can be calculated based on the age of the spouse or common-law partner, which can sometimes result in a lower required withdrawal amount, thereby keeping more of the retirement fund for future use.
You’ll be asked to choose a base age for your payments when you convert your RRSP to a RIFF or your LIF to a RIFF. This can be your age, spouse’s age, or a combination. If you have a spouse or common-law partner younger than you, you can base your payments on their age. This will allow you to take out a bit less money each year, which can be helpful for tax planning purposes.
4. Income Splitting at Age 65
Income splitting at age 65 allows for a more efficient tax strategy for couples. Certain types of pension income can be split with a spouse or common-law partner, potentially resulting in a lower combined tax burden. This typically includes RRSP/RIFF withdrawals and pension income, which, when split, can be taxed at a lower rate if one spouse is in a lower tax bracket.
Once you turn 65, you can split your RRSP income if you convert it to a RIFF or your defined benefit pension plan. This means you can transfer some of your income to your spouse or common-law partner, who may be in a lower tax bracket. This can help you reduce your overall tax bill.
5. Partial Conversion of RRSP to RIFF
It’s unnecessary to convert the entire RRSP into a RIFF. Canadians can convert a portion of their RRSP to start receiving retirement income while allowing the rest to grow tax-free. This strategy can be used to manage tax brackets and guarantee a steady income stream throughout retirement. This can be a good way to manage your income in retirement and avoid paying too much tax in one year.
6. You Can Have Multiple RIFF Accounts
In retirement, you can have more than one RIFF account. This can be helpful if you have different sources of retirement income, such as from a company pension plan or a personal investment portfolio. However, it’s important to remember that you must take out at least the minimum amount from each account each year.
Bonus Tip: Consolidate Your Accounts Before Retirement
While having multiple RIFF accounts is allowed, it’s generally recommended to consolidate your accounts before retirement. This will simplify your finances and make tracking your income and expenses more manageable.
These are just a few of the hidden retirement secrets Canadians need to know. By understanding these secrets, you can make more informed decisions about your retirement and ensure a comfortable and financially secure future.
Remember
- Talking to a financial advisor to get personalized advice about your retirement planning is essential.
- The Canada Revenue Agency (CRA) has a wealth of information about retirement planning on its website.
- The federal government also offers benefits and programs for retired Canadians, such as Old Age Security (OAS) and the Guaranteed Income Supplement (GIS).
- By learning about your options and plan, you can ensure a happy and healthy retirement.
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