Is Your Retiring Client Too Successful? Eight Tax Savers Can Help

As Canadians, we’re encouraged —conditioned even — for most of our working lives to save as much as we can for retirement in an RRSP and to take advantage of the resulting tax savings and deferral. It’s a great deal. So, what happens in retirement when your clients’ savings have exceeded expectations and are now taxable?

Jonathan Chevreau pointed out in a recent Financial Post article that these savers could be faced with a hefty tax bill and a clawback of their OAS benefits. But, you can help them minimize the hit and maximize their retirement income if you do some of the right things, in advance.

Remember, the bigger your client’s RRSP, the more money they will be forced to withdraw each year, once their tax-deferred savings have been rolled over into a RRIF. That must happen by the end of the year in which they turn age 71. These types of clients may even be pushed into a higher tax bracket as they begin to draw down their nest-egg, in combination with other new sources of retirement income, like employer and government pensions.

Encourage your super-saver clients to pursue alternative tax efficient withdrawal strategies like the eight that follow. Getting retirement income planning advice sooner, rather than later, can help:

1. Contribute the maximum to a TFSA in the accumulation years with the tax savings resulting from your RRSP contribution, to build up a tax-free nest egg adjacent to RRSP savings.
2. “Average in” the taxes payable by withdrawing smaller amounts of taxable income over a longer period of time. This means, melting down RRSP deposits before age 71.
3. Delay CPP and OAS benefits perhaps as late as age 70, for high net worth clients. This will increase those public pension benefits while avoiding OAS pension clawbacks.
4. Make early withdrawals from the RRSP while temporarily in a lower tax bracket after clients have stopped working.
5. Be sure to do some pension income splitting with RRSP accumulations once taxpayers with spouses reach age 65.
6. Park any income withdrawn from their RRIF that they don’t immediately need in a TFSA if they still have TFSA contribution room during retirement. The TFSA withdrawals themselves won’t be subject to taxes, unlike withdrawals from a RRIF or RRSP.
7. Even if retiring early, continue contributing to an RRSP for as long as possible if there is still contribution room available. Although there are potential tax implications with a large RRSP nest-egg, it can provide extra security in retirement for those who live to a ripe old age and/or are faced with significant medical and healthcare costs. Those costs are claimable as medical expenses, which can help to reduce taxes payable.    
8. Plus, remember that RRSP contributions can be carried forward indefinitely and used as a deduction after the contribution age limit has passed to offset higher taxable incomes in the future.

It’s hard to believe that anyone can save “too much” money for retirement, but it can be an issue for higher-net-worth clients, and particularly for surviving spouses once the deceased partner’s RRSP or RRIF assets are rolled over. The combined nest-egg can force the remaining partner into a super-high tax level once their compulsory RRIF withdrawals start.

The moral? Being “too successful” at saving for retirement is certainly a nice problem to have and there are ways to help your clients manage it with tax efficiency planning.

One of the best ways to help your clients with the nice-to-have problem of “too much” retirement savings is to become qualified as a Real Wealth Manager. Planning for taxes and retirement income can be particularly complex for high-net-worth clients and the RWM designation will give you the knowledge and skills you need to guide these important clients in the right direction. You’ll become a trusted advisor, learning how to lead a multidisciplinary team in providing a holistic, long-term approach to family wealth planning, including the accumulation, growth, preservation and transition of sustainable wealth.

If you have gaps in the credentials needed to serve your super-saver clients, Knowledge Bureau is here to help:

• The Real Wealth Manager (RWM™) Program
• DFA-Tax Services Specialist™
• MFA-Retirement and Estate Services Specialist™

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