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Written by: Harvey Peters, CPA, CA
You’ve worked hard to build your practice and wealth. But even while you continue to grow, you need to work on your retirement plan. You may find that creating a retirement plan takes as much work, if not more, as running your practice! But it will be worth the effort.
A well-thought-out and prepared retirement plan can save you taxes – and reduce the stress and anxiety about your retirement. Follow these steps to create a retirement plan that will meet your needs.
The first step is to assemble a highly effective wealth management team. Your team may consist of your accountant, your tax advisor, your investment advisor and your banker. You could also involve others in your team, depending on your particular circumstances. But the critical component is to get everybody meeting at least once per year.
The next step is to make sure you know where your various savings are. This sounds simple. But it’s more complicated than you might think.
Consider all the places you may have funds saved: an RRSP, TFSA, Individual Pension Plan, personal savings, and your company and/or holding company, depending on your corporate structure. And that doesn’t even include government sources such as your Canadian Pension Plan (CPP) and Old Age Security (OAS)!
It’s vital to know the attributes of each one of these different pools of savings. Each pool has unique characteristics that can have a significant impact on the timing of withdrawal and the income taxes paid.
For example, your RRSP typically is transferred into a registered retirement income fund (RRIF) by December 31 of the year you turn 71. You must begin to receive this retirement income no later than the end of the following calendar year. On the other hand, CPP is typically collected commencing at age 65, although some provisions allow you to collect it as early as 60 or as late as 70.
You can start collecting OAS at 65. However, if you have net income above a certain level, you must repay part or all of the OAS benefits as OAS clawback for 2015, starts when net income hits $72,809. It’s fully clawed back when net income exceeds $117,000. In the case of savings built up in your company or holding company, the government places no conditions on their withdrawal. You are able to take out the funds as you require them.
You’ve built your wealth management team and have summarized where your various savings are. You’ve become familiar with the unique characteristics of each of your savings funds. Now you are ready to create a retirement plan that takes maximum advantage of these characteristics – this is the starting point to tax savings in retirement.
A good retirement plan will have a strategy for the withdrawal of the various pools of funds in a way that makes the most of their unique characteristics and tax attributes. By knowing the different attributes of your savings pools, you can best mix and match what funds are used and when.
A doctor with an incorporated medical practice has $700,000 of savings in her practice and $500,000 in her RRSP. She incorporated the medical practice by issuing shares to both her and her husband. Both classes of shares are entitled to receive dividends.
Her husband also has an RRSP with a value of $500,000. They are both 60 and have decided to retire. They have no other savings and have decided not to collect CPP early. Based on current income tax rates in British Columbia, they could each withdraw approximately $35,000 of dividends from the company and, assuming they have no other source of income, pay little to no income taxes. At this point we would also review the benefits of early RRSP withdrawals to maximize the use of the lower income tax brackets.
Once our couple reaches age 65, they could convert enough of their RRSP into a RRIF to generate $2,000 of pension income – and this would be eligible for the $2,000 pension income tax credit. They may also decide whether or not to start collecting CPP and OAS.
The decision to collect CPP and OAS will also impact the amount of dividends drawn from the company and/or any early RRSP withdrawals. By having the ability to control the rate of withdrawal of both the company funds and the RRSP, the couple can reduce their income to ensure they are not above the OAS clawback threshold.
While the facts of the above scenario have been simplified, they serve to show how you can reduce your overall tax burden when you create a good retirement plan, all within the rules of the Income Tax Act.
It is never too early to start your pre-retirement planning. To sum up, here’s the foundation of a good plan:
Over the years I have worked with many clients and with all of them, we took the time to create a retirement plan specific to each of their situations. We then met on a regular basis to review and update their retirement plans.
Don’t avoid retirement planning. Face it head-on. With your team and a good retirement plan in place, you can concentrate your stress and anxiety where it should be – on deciding your next vacation spot.
Note: Always ensure you seek independent accounting, tax, legal, and investment advice that considers your particular situation and circumstances.
If you would like more information about creating a retirement plan, please contact Harvey Peters at 604-714-3683 for assistance.
Harvey Peters, CPA, CA is a Partner at Manning Elliott LLP. He provides accounting, taxation and advisory services, primarily to owner-managed private companies and not-for-profit organizations. To contact Harvey, feel free to call him at 604-714-3683 or email him at firstname.lastname@example.org.
The above content is believed to be accurate as of the date of posting. Tax laws are complex and are subject to frequent changes. Professional advice should be sought before implementing any tax planning. Manning Elliott LLP cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.