Delay CPP until age 70? Tips for effectively deducting other retirement income tax before then

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Most Canadians are advised to delay Canada Pension Plan (CPP) and Old Age Security (OAS) benefits until age 70 if possible, but the question remains of how to efficiently deduct retirement income before then.

For simpler portfolios, it’s recommended to first start taking money out of non-registered accounts and leave funds in Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs) or Tax-Free Savings Accounts (TFSAs) for their tax advantages;

However, the strategy can be more nuanced if the investor has other sources of taxable income or a large one-time expense.

“Each client is going to be very different and have their own unique circumstances and tax implications,” says Kathryn Del Greco, senior investment advisor at Del Greco Wealth Management at TD Wealth Private Investment Advice in Toronto.

Why wait to pick up CPP and OAS?

If a person chooses to wait, each year CPP is delayed after age 65, their payments increase by 8.4 percent. That means starting at age 70 increases the money by 42 percent compared to starting at age 65.

The average Canadian who takes a CPP or Quebec pension plan at age 60, the earliest possible, instead of waiting until age 70, could lose more than $100,000 in “secure, worry-free retirement income that lasts a lifetime and tracks inflation.” : ,” according to a 2020 report from the National Institute on Aging (NIA) at the Metropolitan University of Toronto and the FP Canada Research Foundation.

“If you’re in a financial position where you can defer payment, that’s pretty significant,” Ms. Del Greco notes.

Also a longer wait transfers risk from personal savings to inflation-protected government benefits received for life.

Despite those obvious benefits, the NIA report says less than 1 per cent of Canadians defer their CPP. Many choose to take out the funds sooner because they need the money or worry they won’t live long enough to take advantage of government benefits.

However, “if you’re in good health and cash flow isn’t an imminent problem … it’s much better to wait until you’re 70,” says Ms. Del Greco.

Income Strategies for Those Who Wait

For those who are deferring CPP and OAS and need retirement income at the same time, Ms. Del Greco says the general rule of thumb is to withdraw funds from non-registered accounts first, as they are less taxed than registered accounts.

He says someone can take money out of a TFSA if they need extra money in a particular year because withdrawals are tax-free, and the money can be put back into the account the following year without losing investment room. This is in contrast to RRSP withdrawals, where withdrawals are taxed and payout room is lost.

“A TFSA is a great tool for reasons like this,” says Ms. Del Greco.

An RRSP can be a better source of income for retirees who don’t have unrecorded retirement income they can tap into first, he says, or if they have a large RRSP they want to withdraw sooner. For example, Mr. Del Greco notes that RRSPs can only be transferred to a spouse or child upon death, so a single person may want to tap into their RRSP earlier in retirement.

“There is no one-size-fits-all answer,” says Ms. Del Greco.

Jennifer Tozser, senior advisor and portfolio manager at Tozser Wealth Management at National Bank Financial Wealth Management in Calgary, says she uses a mix of withdrawal strategies for retirees and registered and non-registered accounts.

That may mean paying higher taxes in some years, but it can also help investors avoid earning more income than they want later on, which could lead to their OAS benefits being withdrawn.

The strategy gets more complicated when business owners take income from their corporations in retirement, he says.

“The time you move money from your corporation to your personal account and pay the tax should be done with a tax professional,” says Ms. Tozer.

For example, he says, some entrepreneurs might consider taking a huge amount of income from their corporation in one year, paying the tax and losing that year’s OAS. The business owner can then invest the funds in personal tax-efficient accounts such as a TSFA or RRSP, if possible.

Dami Gittens, senior wealth planning partner at Nicola Wealth Management Ltd. in Vancouver, says investors may want to withdraw more from RRSPs at age 60, depending on how much they save to reduce their total income when they start receiving CPP and OAS:

Investors over age 65 can also take advantage of the Retirement Income Tax Credit, a nonrefundable federal tax credit of up to $2,000 of eligible retirement income. Although it is not a huge amount. the federal tax credit rate is 15 percent and the maximum federal tax savings is $300, it helps reduce taxes.

“Even if you don’t need the funds between the ages of 65 and 70, I advise people to take advantage of it,” Ms Gittens says.

He adds that it’s important for investors to start thinking about retirement strategies before reaching traditional retirement age.

“I would say 55 is a great time to start looking at it more closely,” says Ms. Gittens. “That’s when you start to get a clearer picture of what your retirement income will look like. It gives you a little more room to plan accordingly.”

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