Managing Your Tax Brackets in Retirement

In the quest to effectively draw down your retirement portfolio, there’s one critical mistake you can’t afford to make—not managing your tax brackets in retirement.

As we’ve explored in previous discussions, there’s no universal approach to withdrawing from your retirement savings. Your unique circumstances demand a tailored strategy. Let’s dig into the crucial concept of managing your tax brackets in retirement.


The Tax Bracket Balancing Act

The Canadian tax system operates on a progressive scale, meaning the more you earn, the higher your tax liability. Tax rates vary based on income ranges, with the top tax bracket exceeding 50%. The key to effective retirement planning is understanding your current tax bracket and projecting where you’ll stand in the future. Ignoring this aspect can lead to unnecessary tax burdens and potential Old Age Security clawbacks, as your income rises.


Real-Life Example: The Case of Jen

Consider the real-life scenario of Jen, a 65-year-old retiree with an annual spending goal of $60,000. Jen’s pensions and benefits covered most of her expenses, resulting in an income of over $57,000 annually. Anticipating her tax bracket to be at least 33.25%, Jen planned to supplement her income with TFSA withdrawals to minimize taxes. However, by 2030, she was required to start withdrawing from her RRSP, catapulting her into the 43.40% tax bracket, and triggering OAS clawbacks.


Maximizing Tax Brackets for a Brighter Retirement

A more effective strategy for Jen would have been to optimize her tax brackets earlier in retirement. By proactively drawing from her RRSP, she could maximize the 33% tax bracket and reduce her RRSP minimums when it converted to a RRIF. This approach not only lessened her OAS clawback but also saved Jen $70,000 in taxes throughout her retirement, benefiting her children and grandchildren.

Conclusion: Understanding your current and future tax brackets is the linchpin of a successful retirement withdrawal plan. By incorporating this crucial aspect into your strategy, you can potentially save thousands in taxes throughout your retirement..


A Personalized Approach to Retirement Planning

To take control of your retirement finances and optimize your tax savings, click here to access our retirement withdrawal questionnaire. It takes just five minutes, you’ll receive a personalized video from me with strategies tailored to your unique situation.

Marc Sabourin is a Winnipeg-based Financial Advisor and Retirement Specialist with Harbourfront Wealth Management. His specialty is working with pre-retirees and retirees who are looking for retirement, investment, & tax advice. 

Disclaimer: The views expressed are those of Marc Sabourin, Certified Financial Planner, and Investment Advisor, and not necessarily those of Harbourfront Wealth Management Inc., a member of the Canadian Investor Protection Fund

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