Retirement brings a host of financial challenges, especially when it comes to ensuring a sustainable income stream. A couple from Alberta, Walter and Joanne, are navigating these complexities as they seek the most tax-efficient way to draw income from their investments. With a diverse portfolio and varied sources of income, they aim to maintain their desired lifestyle while minimizing tax liabilities. Financial experts recommend a comprehensive plan that includes strategic withdrawals, income splitting, and careful consideration of life insurance policies.
The couple's financial situation is robust, with over $2 million in various investment vehicles. However, they face uncertainties about the optimal order and timing of withdrawals from different accounts. By following expert advice, they can ensure financial security throughout retirement and provide for their children’s inheritance.
Navigating Investment Withdrawals for Optimal Tax Efficiency
Walter and Joanne have multiple streams of income, including CPP benefits, RIF withdrawals, and RRSPs. To optimize their finances, they must determine the best sequence and amount of withdrawals. According to financial planner Ed Rempel, they should focus on income splitting and staying within lower tax brackets to maximize savings.
Rempel suggests that by drawing $36,000 annually from their RRIFs and LRIFs, they can keep their taxable income below $57,000 each year, thereby avoiding higher tax rates. Additionally, splitting CPP benefits can help prevent Old Age Security (OAS) clawbacks. This strategy ensures that they only pay 28% or less in taxes on all their income, saving them approximately $10,000 annually. Once non-registered accounts are depleted, they can shift to withdrawing from TFSAs, maintaining financial stability while minimizing tax burdens.
Evaluating Life Insurance and Estate Planning Options
Deciding what to do with their life insurance policies poses another significant challenge for Walter and Joanne. The policies are expensive to renew, and the couple must consider whether leaving a larger estate is important to them. Rempel advises evaluating how much of an inheritance they wish to leave their children and the potential tax implications.
Giving their children an early inheritance could trigger substantial tax bills, particularly from RRSPs and RRIFs. An alternative approach is to transfer the family cottage sooner, which would result in lower capital gains tax compared to RRIF withdrawals. Ultimately, the couple should prioritize ensuring they have sufficient funds for their own needs and lifestyle, so they never need to rely on their children. Working with a fee-for-service financial planner can provide clarity and minimize the risk of running out of money, ensuring a secure and enjoyable retirement.