in retirement Maximizing retirement income Jennifer Poon, CPA, CA, - - PowerPoint PPT Presentation

Maximizing retirement income

Jennifer Poon, CPA, CA, CFP

Director, Advanced Planning, Wealth

Tax management in retirement

Disclaimer

• The following information is being presented with

the understanding that it is intended for information purposes only

• Neither Sun Life Assurance Company of Canada

nor the presenter has been engaged for the purpose of providing legal, accounting, taxation, or

• ther professional advice
• No one should act upon the examples or

information without a thorough examination of the legal/tax situation with their own professional advisors, after the facts of the specific case are considered

• Pre-retirement tax planning
• Tax objectives in retirement
• Tax bracket management &

sources of retirement income

• Tax planning practices in retirement

Agenda

3

Pre-retirement tax planning

Key inputs in a typical retirement plan

• Retirement age (or years to retirement)
• Retirement income needs

5

Tax objectives for growing your wealth

Reach retirement goal faster Possibility for lower risk on required return

• Lower pre-tax

required return

Higher reinvestment rate

• Near

pre-tax return

• Higher annual

compound growth

Tax savings & tax deferrals 6

Common techniques

• Maximize RRSP
• TFSA
• Tax-efficient non-registered investments
• Corporate class
• Permanent life insurance products
• T-series
• Other

7

Tax objectives in retirement

What happens when clients reach their retirement?

8

Shift the focus in retirement

• Longevity risk
• Withdrawal rate
• Income replacement rate

9

Make it last

• Withdrawal rate
• Maximize government and other sources of

income

• Generate required income from portfolio
• Maximize estate value

10

Preserve estate assets

• Not all pension sources can be passed on to the

next generation

• Company pension
• OAS, CPP, QPP
• Tax savings from age/pension related tax

credits

• Drawing on the above sources first means more

personal assets to pass on to loved ones

11

Risks to applying pre-retirement tax principles in retirement

• Maximize tax deferral
• RRSP: defer withdrawals until age 71, only drawing out

the age minimum

• Consequences:
• RRSP continue to grow to a larger sum
• Large registered balance will trigger larger age

minimum withdrawal

• Large taxable amount will put clients in a higher tax

bracket

• Potential to lose government pension benefits or credits

12

Risks to applying pre-retirement tax principles in retirement

• Only hold retirement assets in registered accounts
• Put all retirement savings in RRSP to maximize tax

deductions during working years

• Require larger withdrawals to provide for income needs
• Larger taxable income inclusions
• Avoid taxable events
• May be beneficial to trigger taxable events to crystalize

gains, minimize estate tax liabilities, or facilitate gifting or inter-generational asset transfer

• Controlled taxable events

13

The importance of tax bracket management

14

Tax bracket management

• Determine target tax bracket
• Maximize taxable income to upper limit of tax

bracket to take advantage of lower marginal tax rate

• Reduce taxable income to stay in the upper limit of

desired tax bracket to avoid a higher marginal tax rate

15

Target tax bracket

• Required after-tax income
• Sources of income
• Government benefits income thresholds
• Effective tax rate at death

16

Government pension benefits

• Eligibility based on:
• Age
• Residency
• Income
• Contributions
• Managing taxable income within

income threshold

17

Snowbirds – cross-border issues

• Residency for government benefits
• Residency for Canadian tax
• U.S. estate tax
• U.S. gifting tax
• Foreign assets
• Foreign sources of income

18

Sources of retirement income

19

Canada pension plan (CPP)

• Must apply
• Can apply as early as age 60
• Average amount paid is $610.57 monthly ($1,065

monthly maximum)

• Key change effective January 2012
• For ages 60-65, clients must make CPP

contributions based on employment income

20

Old age security (OAS)

• Must apply
• Monthly payment for most Canadians based

primarily on years of residency in Canada

• New 2016 Federal Budget sets OAS eligibility

back to age 65

21

Guaranteed income supplement (GIS)

• Must apply
• File an annual tax return
• Additional money to OAS for low-income seniors

living in Canada

• Eligibility follow the same changes as OAS

22

Government pension benefits

23

• 1 Net income before adjustments (line 234 on your tax return) for the period July 2016 – June 2017

Tax planning practices

Tax credits and pension splitting

24

Available tax credits

25

• 1 Net income (line 236 on your tax return)

Pension income credit

• Line 115: (T4A income) most pension income

including pension, foreign pension income, annuity, RRIF and LIF payments

• Line 116: elected pension split amount
• Line 129: (T4RSP) RRSP withdrawals

26

Pension income amount

• Pension income and some foreign pension

income1

• Registered Retirement Income Fund (RRIF)
• Pooled Registered Pension Plan (PRPP) and

PRPP funds transferred to Registered Retirement Savings Plan (RRSP), RRIF, and annuity

• RRSP withdrawal before age 65 – only as a result
• f death of a spouse or common-law partner
• Income from an annuitized RRSP
• Retirement Compensation Agreement (RCA)

amounts for pensioners age 65 or older

27

1 Not all foreign pension income will qualify.

Eligibility for pension income splitting

• The client and their spouse/common-law

partner:

• Were residents of Canada at tax year-end or date
• f death
• Were not separated or living apart for more than 90

days in the start of the year, due to breakdown in marriage or common-law relationship

• The transferor:
• Received pension income in the tax year that

qualifies for the pension income amount, or

• Is at least 65 and received qualifying amounts from

a retirement compensation arrangement (RCA)

28

Ineligible for pension income splitting

• OAS pension
• CPP/QPP
• Foreign pension income that is tax-free in Canada
• Income from a United States individual retirement

account (IRA); or

• Amounts from a RRIF and transferred to an RRSP,

another RRIF or an annuity

29

How does pension income splitting work?

A = number of months the client was married or living as common-law B = number of months in the tax year C = total amount eligible for pension income splitting from transferor Maximum transfer amount = A x C x 50% B

30

Example – pension income splitting

31

1 Average Canadian taxes payable, 2014 combined federal and provincial tax rates effective March 2014

Investment income preference

• Interest taxed as an ordinary income
• Under $72,000
• Eligible dividends
• Under $52,000
• Capital gains
• 50% taxable
• Under $144,000
• No taxable income

32

Tax free savings account (TFSA)

• TFSA transaction summary
• 2016 annual contribution room reverse back to

$5,500 per year

• If you have never contributed, cumulative room of

$46,500

• No income tax on withdrawals
• Contribute for spouse/partner/children over 18

33

Tax free savings account (TFSA)

• Tax shelter for taxable income
• No tax on withdrawals
• Flexible cash flow without moving the client
• utside the target tax bracket

34

Non-registered investments

• Owned by the individual
• Includes, but not limited to:
• Equities (stocks)
• Bonds
• Mutual funds
• Segregated funds
• Payout annuities
• Shares in a private corporation
• Property
• Included in your retirement plan income

calculation

35

Prefer no taxable income?

The situation

• 1. Outside target tax brackets and does not require

cash flow stream from the investment until later

• 2. Outside target tax brackets and require cash flow

from the investment

36

What is T-Series?

• T-Series provides 5% or 8% fixed

monthly distributions

• Distributions consist mostly of the

investor’s original capital

• Not included in current year’s taxable

income

A return of capital reduces an investor’s adjusted cost base (ACB). Capital gains taxes are deferred until units are sold or until the ACB goes below zero.

37

1Highest combined Federal and Ontario marginal tax rates 2A return of capital reduces an investor’s adjusted cost base (ACB).

Capital gains taxes are deferred until units are sold or until the ACB goes below zero.

High risk Low risk

No tax on return of capital

38

Key benefits of T-series

• Flexible cash flow
• Avoid OAS clawback
• Maximize government benefits

39

Assets Current yield Investment income House $1,000,000 0% $ - Equity mutual funds 750,000 2% 15,000 Fixed income mutual funds 1,250,000 3% 37,500 Total $3,000,000 $52,500

Meet Marie

For illustrative purposes only.

Case facts Age: 72 Pensioners with $3M in assets Required income = $90,000 OAS, CPP and RRIF withdraws = $67,000 Conservative portfolio consisting of mostly fixed income mutual funds and Canadian equity mutual funds

40

The pensioner’s dilemma

• Although Marie has a sizable estate, she has an annual

shortfall and cannot pay for all of her expenses

• Her taxable income is over the Old Age Security (OAS)

clawback amount of $72,809 she has to repay $7,859 of her OAS benefits

• If Marie earns more taxable income, this will push her to

a higher tax bracket and trigger a higher OAS clawback

How can Marie generate sufficient cash flow to meet her needs without taking on more risks or changing her asset mix?

PROBLEM:

41

The solution

 CPP, OAS and RRIF withdraws, which accounts about $67,000 of her

income, are taxed as ordinary income, Marie will require at least an additional $37,000 in order to pay for her expenses of $90,000

 T-series payments are paid primarily from the investment’s original cost

base (commonly referred to as return of capital), and are not included in Marie’s taxable income. This strategy will bring Marie to a lower tax bracket and not trigger an OAS clawback

For illustrative purposes only. Source: Sun Life Global Investments Inc. A return of capital reduces an investor’s adjusted cost base. The following illustration assumes no dividends. Investor should expect some dividends (that are taxed as eligible dividends or capital gains) from time to time.Capital gains taxes are deferred until units are sold or until the ACB goes below zero. Investors should not confuse this cash flow distribution with a fund’s rate of return or yield. While investors in Series T8/S8 and/or T5/S5 will be able to defer some personal capital gains, they must still pay tax on capital gains distributions that arise from the sale of individual holdings by fund managers, and on interest and dividend distributions. T- series will also pay a distribution that must be reinvested in December, consisting of income and capital gains.

ASSETS PAYOUT CASHFLOW House $1,000,000 0% $ - Equity Class T5 750,000 5% 37,500 Income Class T5 1,250,000 5% 62,500 Total $3,000,000 $100,000 Taxes ($ nil) After taxes $100,000

TAX SAVINGS: $29,819 Additional cashflow = $71,620 42

Let’s do better

For illustrative purposes only. Source: Sun Life Global Investments Inc. A return of capital reduces an investor’s adjusted cost base. The following illustration assumes no dividends. Investor should expect some dividends (that are taxed as eligible dividends or capital gains) from time to time.Capital gains taxes are deferred until units are sold or until the ACB goes below zero. Investors should not confuse this cash flow distribution with a fund’s rate of return or yield. While investors in Series T8/S8 and/or T5/S5 will be able to defer some personal capital gains, they must still pay tax on capital gains distributions that arise from the sale of individual holdings by fund managers, and on interest and dividend distributions. T- series will also pay a distribution that must be reinvested in December, consisting of income and capital gains.

ASSETS PAYOUT CASHFLOW House $1,000,000 0% $ - Equity Class T5 750,000 5% 37,500 Income Class Series O 1,250,000 0%

• Total

$3,000,000 $37,500 Taxes ($ nil) After taxes $37,500

TAX SAVINGS: $29,819 43

• Customized cashflow with T-series

Sun Life T-series Class

• Tax-efficient cash flow
• Minimize OAS clawback
• Customized portfolio to meet your needs
• Ability to switch investments without triggering an

immediate taxable disposition

• Ability to customize cash flows

44

The bottom line

• Use a different tax management approach in

retirement than in pre-retirement

• Maximize retirement income
• Preserve estate assets
• Build flexibility in clients’ retirement plans

45

Thank you!