Tips to minimise your taxes

Tax Saving Tips for your locked-in pension plan

If you read some of our other articles, you know that money in a locked-in pension plan is tax sheltered. Any money the plan (LIRA, LRSP, RLSP) makes is not taxed as long as it remains in the locked-in plan. When you will be closer to retirement they are a number of factors and options available to you that if you plan carefully will allow you to maximise tax efficiencies. Those factors are:

1. When you reach the age of 55 (50 in some provinces), you will have the option to transfer your plan into a different type of locked-in plan which is normally a LIF or similar (PRIF/RLIF/LRIF/RRIF). That process is also tax free which triggers two things. You will have to start doing mandatory minimum withdrawals and more importantly you may have an option to unlock, tax free, 50% up to 100% of the plan as long as you transfer it into a unlocked registered savings plan such as a RRSP or TFSA.
2. You will have to make a decision as to when you want to start receiving the government’s pension plan (Canada Pension Plan, Regime des Rentes du Quebec) as you can choose to receive it as early as 60 as a reduced benefit, 65 for full benefit or as late as the age of 70 for an increased benefit.
3. Additionally you may have an employer’s private pension plan also know as an RPP or your own accumulated investment and savings.

If you do not plan carefully how all of these affect each other and you don’t take advantage of some of the options available to you, you may end up in a situation where you are paying more taxes than you should had you planned in advance.

But don’t worry, we are here to help and give you some tips!

As with other situations we have explored in our other articles, it is important to understand that each person’s situation will differ and what might be good for one person may not be for another and we highly recommend having a consultation with a proper tax expert when you will be near retirement age. We think the ideal age to have such a consultation is 54 for most people as this is when you have to start making choices on some of the options you have depending on the type of plan you have.

The main strategies that you can use to minimise your tax savings is timing. Meaning when to activate some of your pension benefits from your different sources (LIRA, CPP, RRSP, etc).

As a general rule, if you are still working even if you have reached the age of retirement and that your employment income is enough to pay your bills and provide you with the lifestyle that you are satisfied with then you should delay taking money out of your Locked-in pension plan even if you are allowed to do so. The same logic applies with starting to receive the Canada Pension Plan Retirement benefit. You can delay the receipt of this benefit until the age of 70 if you choose so and the amount you will receive will increase for every year that you delay the start.

If you start receiving these benefits or taking money out of your Locked-in pension plan while you are still employed full time then a signification portion of that income may go to the taxman due to Canada’s gradual tax rate where once you reach a certain level of income, additional taxes applies. As a general rule, unless you need the funds for personal reasons be it to pay debt, treat yourself to a special purchase or increased lifestyle, you should plan things so that all your income sources are limited to $60,000.00. this will ensure that you are in the lowest tax bracket as every individual pays no tax on the first $12,000 their earned and then 15% on the next $48,000. After that your taxes will increase to:

• 20.5% on the next $48,534 of taxable income (taxable income between 48,535 up to $97,069 which represent roughly a gross salary of $60,001 to $109,069), plus
• 26% on the next $53,404 of taxable income (taxable income between $97,069 up to $150,473 which represent roughly a gross salary of $109,069 to $162,473)), plus
• 29% on the next $63,895 of taxable income (taxable income between 150,473 up to $214,368 which represent roughly a gross salary of $162,474 to $226,368)), plus
• 33% of taxable income over $214,368 which represent roughly a gross salary over 226,368)

The above numbers are only for Federal Tax rate and do not take into account provincial taxes which vary province by province.

*Depending on your situation we may recommend options that will require the services and assistance of 3rd service providers. These service providers have their own cost and fees in addition to our $149.99 fee. However you will be informed of any additional fees before proceeding and nothing will be done and not a single cent charged until you consent and agree.