Income splitting is often talked about in reference to high-income earners, but what about the average Canadian family? For high-income earners there are income splitting strategies like spousal loans or “income sprinkling”. Spousal loans are for families with lots of non-registered savings and a large difference in marginal tax rates between spouses. “Income sprinkling” can be used by families who own a corporation (although with the new TOSI rules has changed dramatically).
But what about your average Canadian household? Are there are income splitting options for them?
One very accessible type of income splitting is a spousal RRSP. Unlike other income splitting strategies this one is very easy to set up, it doesn’t require a lawyer, and it’s easy to understand.
The big benefit of a spousal RRSP is that the average family can use it to “equalize” their registered assets before retirement. This allows for a more equal distribution of income in retirement and a lower overall tax bill for a household.
In addition to lower income tax it also opens up more opportunities to maximize government benefits in retirement.
But you might be wondering, isn’t it possible to split income after age 65 anyway?
While its true that after age 65 income splitting is much easier to do, it’s still a best practice to try to equalize registered assets before age 65. This allows for the maximum flexibility when creating a retirement drawdown strategy, especially when retiring early.
Equalizing registered assets can be extremely beneficial, especially before the age of 65 when there are fewer income splitting opportunities, for this reason we sometimes want to look at using a spousal RRSP to help split income in the future.
Low-income retirement planning requires a very different set of tools than your average retirement plan and this can sometimes lead to trouble when a soon-to-be low-income retiree gets advice that has been tailored for someone with a much higher income.
What we need to consider for a low-income retiree is very different than for your average retiree and the recommendations in a low-income retirement plan can sometimes be the opposite of a regular retirement plan.
The drawdown of investment assets, the timing of CPP and the timing of OAS are among many factors that differ in a low-income retirement plan.
When it comes to low-income retirement planning we’re primarily concerned with one thing, government benefits. We want to ensure that the way we save pre-retirement and the way we create income after retirement does not impact the amount of government benefits received.
This can be very tricky and can often lead to some less than obvious recommendations.
Before we get into some ideas to consider around low-income retirement planning lets look at why government benefits are the main consideration.
TFSAs are an amazing tax sheltered account that every Canadian has access to regardless of income. Unlike RRSP contribution room, which is based on employment income, we all get the same amount of TFSA contribution room every year.
The TFSA is a perfect way to save for retirement. In fact, for many young people they are better off starting with their TFSA rather than their RRSP, especially when they’re starting out at a lower income.
At lower income levels the TFSA can provide many advantages versus the RRSP. Namely that future withdrawals aren’t taxed and won’t count towards government benefit claw backs.
There are other benefits to the TFSA too, like if you have a habit of spending your tax refund. If that’s the case then maybe a TFSA contribution is a better idea.
My wife and I have a BIG goal for our TFSAs. Our goal is to grow our combined TFSAs to $1 million by the time we reach early retirement at age 55. This is an ambitious goal, one that we may not meet, but it’s fun to have a BIG financial goal like this. We find it motivating to have BIG financial goals and it gives us something to work toward.
Two years ago I provided an update on our progress to our one million TFSA goal and I think it’s time to do it again. Not just for the accountability but also because it’s good to share how amazing the TFSA is for these kinds of goals.
When we do our own financial planning we’re often too close to our own situation to have an objective perspective. We may focus on the wrong problems… or take a narrow view of the potential solutions… or miss potential issues entirely.
One of the benefits of working with a financial planner is that they provide a second set of eyes for your financial plan. Most people are already on the right path, but there are common issues that may end up working against you. A financial planner can help find these common mistakes that may otherwise go unnoticed.
Financial planning isn’t rocket science, it’s something that can be done on your own. The math itself isn’t terribly difficult, and there are tools available online to help, but one of the major downfalls of the DIY approach is that we can be somewhat oblivious to our own personal biases.
Basically, we’re too close to our own financial situation to be entirely unbiased (This goes for financial planners too!) There are certain financial planning mistakes that we all tend to make if we’re not careful.
These mistakes can lead to potential issues over time. These issues can create more risk, or decrease investment return, or increase taxes, or create a higher risk of running out of money in retirement.
These mistakes are quite common and identifying these potential issues is the first step to creating a stronger financial plan.
Planning for retirement is all about spending. Spending impacts almost everything about a retirement plan. More spending means more withdrawals and more taxes. Less spending means less withdrawals and less taxes.
More spending could mean there is a higher risk of running out of money. Less spending could mean that we need to be careful around estate planning because there may be a large amount of assets being passed on.
But spending needs to be supported by investment assets, so how much do we need to have invested? How much does it take to retire?
In this post, we’re going to take an interesting look at this question. We’re going to look at how much we need to retire depending on the province we live in. We’re going to look at how much you need to have invested to support the same retirement spending.
Disclaimer: Nothing in this post should be considered financial planning advice. We’re going to use averages and province wide tax rates with only general deductions. Because we’re all unique in some special way, the numbers in this post won’t apply to you, but the relative amount you need to have invested between provinces is interesting!
Asset location is the idea that certain assets are more tax efficient when held in certain types of accounts. Different assets classes, and more specifically different types of income, are taxed differently in Canada. Dividends are treated differently than capital gains which are treated differently than interest income. Even certain investments inside “tax free” accounts like the TFSA and RRSP can sometimes lose money to taxes but many people may not realize this.
When you’re just starting out you might hold bonds/fixed income, Canadian equities, US equities, and global equities all in one account (probably the TFSA if you’re just starting out). When you’re just using one account, asset location is less of a concern, but once you start to use a second account (maybe an RRSP), then you may want to ensure you have the right asset in the right place to minimize the drag of taxes.
This becomes especially important after you’ve maximized your TFSA and RRSP and have started to use a non-registered account. Non-registered investments are fully taxable at your marginal tax rate so it’s a good idea to put the most tax efficient investments inside your non-registered account.
Taking advantage of an asset location strategy requires a bit of work. Rather than having the same asset allocation in each account (which is super easy to manage), it means having different assets in each account and managing asset allocation across the entire portfolio.
How much money do you need to have in non-registered assets before asset location adds value? $50,000? $100,000? $500,000? $1,000,000? Let’s take a look…