Today we’re talking about income splitting – how it impacts you, how you can save money, and how you can dramatically save taxes in your retirement.
You’re retired; let’s talk about how you can split your pension when you’re younger than 65. If you’re lucky enough to retire before you turn 65, the only pension that you can spit is a direct benefit pension (DB).
After 65 you get a ton more flexibility. First of all, registered assets. If you have it in an RRSP, you cannot split it, but if you convert it to a RRIF it can be split. That’s one great way to split some income through a RRIF. So, a lot of the income can come from a RRIF. You can split it that way.
The Canadian Pension Plan (CPP) can also be split. If you have income coming from the CPP it needs to be split. You will need to call CRA and fill out some forms, as the CPP needs to be split at the source.
You can split it up to 50%. The rules are tiny bit complicated depending on how long you’ve lived with your spouse, but it can be split, it’s something you can do.
Now let’s talk about, non-registered assets. These consist of either investments that you’ve put aside in your life, and it’s in a non-registered account with income that’s being generated from there.
Now, you will want to talk to your accountant about this, but generally that income can be split according either one spouse or the other.
What about rental income?
Let’s say you own a property and it’s jointly owned personally. You can and you’re going to be wanting to split that as well. That’s another thing you can talk to your accountant about doing as well.
All right, so you split your registered assets, and you’ve split your non-registered assets. Now the objective when we’re doing this is very important.
Why do we want to split income?
I had two clients come in the other day, $50,000 of income each. That’s $100,000 together, with an extra nearly $8,000 in taxes by not splitting it. Now that is every year! Or if we look at that over 25 years of retirement, that would add up to $193,350 in tax savings in your pocket!
Splitting income is critical and I’ve seen it so many times with retirees who are being a little too nonchalant about their tax filings or trying to do it themselves to save a few dollars. It is critical for you to know the proper way to income split, as I’ve seen it not done properly so many times.
If you’re income splitting, you’re saving tax on $100,000 – even if your income is significantly less, let’s call it $60,000, your savings are still $4,000. That’s a saving that happens every single year.
If you ever thought, why does income splitting matter – it does matter. You have got to do it the right way. You have got to convert that RRSP to a RRIF.
You have got to take a look at all your income. You have got to make sure they’re coming from a split source and then you can actually start saving taxes every single year. There are a number of other factors to be considered in this scenario, so it’s best that you talk to your accountant.
At the Tetrault Wealth Advisory Group, we work with our clients to develop a customized financial plan, which includes the retirement projections and how to optimize your income for tax efficiency!
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