# Pension Income Tax Credit & Pension splitting



## jman123 (Jan 28, 2015)

Greetings,

I have just turned 65 this year and there is a good likelihood that I will retire at the beginning of 2019. I live in Quebec.

From what I read on the web it seems that at 65 years old it is advisable to create a RRIF from my RRSP's to the tune of 14K, and withdraw 2K for each of the 7 years between 65 and 71 in order to claim the Pension Income Tax Credit for those years.

My income for 2018 will be approximately 48K from work and another 10K from QPP, so a total of $58K. My wife who is 63 years old , has a variable income which will be approximately 18K this year, no other pension income.

I was also thinking of pension splitting so I would take 4K per year from a 28K RRIF.

I was dissuaded by my financial advisor from taking this approach because increasing my income from $58K to $60K , plus the charge(s) of setting up the RRIF and administration fees would not be to my advantage. He stated that the Pension Income Tax Credit is a federal tax credit and would not help on the income taxes required on the Quebec side. 

Your opinion please.

Thank you


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## OhGreatGuru (May 24, 2009)

I can't speak to the Quebec taxes, but there are on-line tax calculators that might help you out.

Outside of Quebec I would think that would be good strategy. It has been recommended a number of times on this and other forums for people who don't have other qualifying pension income.

If your financial institution wants to charge you unreasonable administration fees for setting up and administering a RRIF, maybe you should transfer it elsewhere. Maybe it's the small size of the RRIF that bothers them. What if you RRIF'd $100K, and only made the minimum withdrawal? The first withdrawal would be about $4k. There would be no tax withheld.


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## jman123 (Jan 28, 2015)

Thanks for the advice. I will bring up with my advisor RRIFing $100K.


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## Numbersman61 (Jan 26, 2015)

jman123 said:


> Thanks for the advice. I will bring up with my advisor RRIFing $100K.


Why stay with your current advisor? I would advise getting a new one since your current advisor is providing very poor advice.


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## jman123 (Jan 28, 2015)

New advisor so I will give him some time. Maybe he balked at my original idea because the 14K or 28K RRIF was too small and not worth any gains realized. I have emailed him about opening a 54K or 108K RRIF instead and using my wife's age of 63 gives me a minimum withdrawal rate of 1/(90-63) or 3.7037% which would result in a 2K or 4K minimum withdrawal. 

Waiting for his response.


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## OhGreatGuru (May 24, 2009)

jman123 said:


> ... He stated that the Pension Income Tax Credit is a federal tax credit and would not help on the income taxes required on the Quebec side.
> 
> ...


I think you need a second opinion. I am not familiar with Quebec tax forms, but their Schedule B certainly seems to have an amount for Retirement Income on Lines 27 & 28. See also https://www.revenuquebec.ca/en/citi...by-line-help/96-to-164-total-income/line-122/ which makes it clear Line 122 includes RRIF income, and that _"The amount on line 122 may entitle you to an amount for retirement income. See the instructions for line 361.."_


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## Jimmy (May 19, 2017)

I can't see it as a bad thing. Basically, you get to deduct $2,000 from 'pension' type income starting at age 65. So at a 20% tax rate, ON's lowest you get $400 in tax savings. Seems to make sense to move up the RRIF 6 yrs to take adv of this. 

You get $2,400 over the 6 yrs you otherwise wouldn't.


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## jman123 (Jan 28, 2015)

Well my financial advisor got back to me and this is what he sent as page 1: 

>>
Focus Points [email protected] [email protected] RRIF Delayed

RRIF Withdrawal $1,000 $2,000 $0
Total Taxable Income $60,300 $61,303 $59,300
Total QC Taxes $7,569 $7,808 $7,269
Total Fed Taxes $6,630 $6,708 $6,553
Net Deposit $47,194 $47,893 $46,559
Difference versus RRIF delayed $635 $1,334 N/A
Tax Loss $365 $666 N/A
<<

Sorry for the format. I can't seem to get it lined up under the title. Anyways... 

This is what he states :
>>
As I suspected, you will find that the net benefit of converting either $54K or $108K of your RRSP’s is not financially beneficial to you as long as you continue to earn employment income. 

Example: $54,000 RRIF paid you $1,000 for the year and your net deposit on that payment is $635 resulting in a +30% reduction even after taxing into consideration the pension tax credit. Same applies for the $108K scenario. 
<<

It looks like he got these results using Naviplan and he has supplied a "Projected Income Tax Detail" for each of these scenarios. It seems that for the RRIF at 54K the Pension Credit is $150, for 108K it is $300. 

I'm having a bit of trouble understanding his table above. I look at it that for "RRIF Delayed" my taxes add up $13,822 , while for "[email protected], $1000" my taxes would be $13,822. The difference would be $377 that I would pay more in taxes from a $1,000 RRIF withdrawal so wouldn't that mean I pay 37.7% on the additional income? 

If I do the same for "[email protected]" I get a difference of $694 from a $2,000 RRIF withdrawal so that looks like a 34.7%. 

Originally, I was thinking of $4K RRIF withdrawal and split the pension income with my wife 50-50. Can I do that if my spouse is less than 65 years old? She makes about $16K per year. Also, can I split the pension income 0-100 where she gets it all? 

I'm a bit confused as all I am reading is that you should convert some of your RRSP's to a RRIF at age 65 in order to claim the $2,000 pension income tax credit. Now it seems it only pays below a certain income. 

Your thoughts?


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## jman123 (Jan 28, 2015)

Sorry for $1000 RRIF withdrawal my taxes would be $14,199 = $7,569 + $6,630 (not $13,822)


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## AltaRed (Jun 8, 2009)

I am pretty sure the pension income tax credit does apply under age 65 for qualified types of pension income, such as RRIF payments.
No, you cannot pension income split more than 50% of your pension (RRIF) income with your spouse.


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## Jimmy (May 19, 2017)

If you delay the RRIF, you will be wdrawing greater amounts in later years. Just as an example, compare a RRIF at 65 to 71 of $2,000, so you can w draw say 6x $2,000 or $12,000 and apply a $2,000 credit x 6 or $12,000.

Now say you wdrew this entire amount $12,000 at age 71. 1) you only get a 1 x $2,000 credit . Your income tax bill too could be much steeper as you are wdrawing a larger amt maybe putting you in a higher bracket. 

That isn't a likely scenario, but you will have to spread that $12000 out over your retirement years. The PV of cash flows is better for earlier wdrawls as well. You may have to talk to your advisor about these sorts of scenarios and do a PV value of your options.

I guess it really boils down to what your income is now vs retirement and tax rates accordingly. If you are in a lower bracket after 71, may be best to defer. If similar, may be best to start now.


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## AltaRed (Jun 8, 2009)

Revised: I agree with Jimmy that this is a PV calculation. Pulling out $4k per year via RRIF so each of you can get $2k tax free sounds lucrative but is it long term?


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## jman123 (Jan 28, 2015)

ok, thanks for the replies. Anyways , it's is quite probable that I will be retiring at the beginning of 2019 and I will only have the QPP as income. I will probably then take my OAS then as I have delayed it. I will then probably open a RRIF then and start living on my RRSPs and RRIF(s) as well as QPP and OAS. 

I started my QPP early because my father died when he was 62 and I thought "a bird in the hand ...". 

Since retirement is 5-6 months away maybe just wait on the RRIF.


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## jman123 (Jan 28, 2015)

AltaRed said:


> Revised: I agree with Jimmy that this is a PV calculation. Pulling out $4k per year via RRIF so each of you can get $2k tax free sounds lucrative but is it long term?


Sorry but can you explain what a "PV" is? 

Can anyone point me to a good online tax calculator so I can do these what-if scenarios myself?

Anyways, my retirement seems pretty imminent so I don't think losing out on the pension income tax credit for this year will make much of an affect overall.

Thanks


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## agent99 (Sep 11, 2013)

What I did for my wife at about same age, was convert a large enough part of her RRSP to a RRIF so that she could draw an amount each year from 65-71 that would help draw down her RRSP and provide her with the $2000 pension income. If I recall correctly, we converted enough to allow for about $4000 withdrawal pa. But key here is that you can convert any amount you wish. You only are required to withdraw annually the minimum required by RRIF rules. 4% at 65 increasing to 5.28% at 71. (Or less if based on younger spouses age). 

So if you convert say $20k, you have to draw $800 at age 65. But you can draw any amount more than that. The actual amount can be decided on in say mid December when you know what your income for that year was. I would run the numbers through the previous years tax program to try different amounts and hopefully minimize tax. If you withdraw $2000, you get the maximum pension tax credit (15% of $2000 but less in Quebec)

Other than the pension income credit, drawing down your RRSP will reduce the required minimum withdrawal rate after 71 and thus reduce future taxes. Between 65 and 71, you need to decide just how much to draw without moving into a higher tax bracket by running numbers through a tax program (Many like Studio Tax are free). I already had a small pension income, but I still drew down my RRSP by an amount that kept my total income one bracket down from where it would be once I had to do full conversion to RRIF at age 71.


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## agent99 (Sep 11, 2013)

jman123 said:


> Sorry but can you explain what a "PV" is?
> 
> Can anyone point me to a good online tax calculator so I can do these what-if scenarios myself?


Several of use Studio Tax. It is approved for use in Quebec and it is free! 

https://www.studiotax.com/en/

Just run previous tax year version. 

There are more simple on-line calculators, but better to put all your info into a proper tax program like Studio Tax.


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## Eclectic12 (Oct 20, 2010)

agent99 said:


> ... So if you convert say $20k, you have to draw $800 at age 65. But you can draw any amount more than that. The actual amount can be decided on in say mid December when you know what your income for that year was. I would run the numbers through the previous years tax program to try different amounts and hopefully minimize tax ...


A good idea for those comfortable with computers to use the previous years tax program. IIRC, StudioTax has released their program around mid-December some years so it may work out to be able to use the current year tax program.


Cheers


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## AltaRed (Jun 8, 2009)

jman123 said:


> Sorry but can you explain what a "PV" is?
> 
> Can anyone point me to a good online tax calculator so I can do these what-if scenarios myself?
> 
> ...


PV = Present Value calculation which takes into account today's value of future payments (e.g. from your RRIF) over the next 20-30 years. The issue is that while you can take advantage of $2k of 'tax free' income today because of the pension income credit, you are giving up future growth of the capital you have withdrawn in the future. It can be a complicated calculation depending on 'return' assumptions of your capital going forward and your expected tax rate. IOW, you just can't assume a black and white answer of $2k tax free income per year between now and the year you would have to start withdrawing from a RRIF.

You have not really told us much in the way of expected income post-retirement, nor size of your RRIF, so we have no way of knowing whether you will be paying substantial tax post-retirement or not. I have assumed based on your income levels currently being relatively modest, that you are NOT looking at a $1-2M RRIF, but something more modest than that. I could be very wrong. Some folk here (and I think Agent99 is assuming that) have very large RRSPs and that is going to pose a tax problem when they have to RRIF...and then it makes a lot of sense to draw down some of that post-retirement and before one must start to RRIF. 

I agree with Agent99 Studio Tax is an excellent program to use for what if analysis. You can also use the online calculators at taxtips.ca too.


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## jman123 (Jan 28, 2015)

Thanks for letting me know about Studio Tax. Will definitively download and try. 

My financial status :

My total RRSP and LIRA : 677K
My wifes RRSPs : 411K
Total : 1088K 

My Non-REG : 22K
My wife's NOn-REG : 10K

My TFSA : 62K
My wife's TFSA : 60K

Total Worth : approximately 1.25M

TFSA pretty much topped up. Only have contributed to TFSA last few years.

As I mentioned I expect to make about $48K from work income this year. Last year I was making about $80K but now I only work Monday thru Wednesday so at 60% level.

I own a house mortgage free worth $400K to $450K and we are looking at downsizing to a rental condo. Maybe yes, maybe no.

Last year expenses totaled $36K without considering travelling. Would like to spend $10K+ on this. 

Plan is/was to draw down our registered funds (RRSPs and LIRA) 4% per year and whatever excess from needs/wants goes to TFSA and registered plan. I have a total capital loss of $40K which was incurred this year after settlement of a class action suit against a Ponzi scheme I got caught up in.

That's all. A man of modest needs.


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## AltaRed (Jun 8, 2009)

I'd say that is a good asset base with which to retire. The real point of asking was whether early drawdown of your RRSP by RRIFing $4k/year ($2k each for you and spouse) jeopardize you potentially running out of money. Probably not, which suggests your idea of $4k withdrawal per year leading up to mandatory RRIF withdrawals could be a good idea. But I'd agree it is not too relevant whether you do something this year or not on the $2k pension income idea. Tax optimization is a good thing but be careful not to get so caught up in the trees that you forget about the forest.

A little off-topic, but you talk about 4% SWR withdrawal, but not sure you mean in the "classical" sense, or a modified sense, e.g. 4% of balance at the beginning of each year. The classical definition of SWR (4% of starting balance and increasing by inflation each year) has its weaknesses. You may want to check out a concept called Variable Percentage Withdrawal located here https://www.finiki.org/wiki/Variable_percentage_withdrawal that typically allows you to spend more money most of the time, but is based on variable amounts in 'down' years. The key thing is that one can switch on to, or switch out of, SWR or VPW concepts as you wish.


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## ian (Jun 18, 2016)

We have used Studio Tax for several years. I like it. I started using it even when our accountant did the taxes. I wanted to do a pro forma on my own. Now I do both returns on Studio Tax. Last year was the first on OAS. We split pension, we do spousal loans.

We link the returns. At the very end I pushed the button to minimize tax and OAS clawbacks. The program came back and told me how much pension income I had to shift to my spouse in order to minimize tax and eliminate claw backs. It is a very useful tool, saved me some manual calculations, and the calculations are far less error prone.


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## jman123 (Jan 28, 2015)

AltaRed said:


> A little off-topic, but you talk about 4% SWR withdrawal, but not sure you mean in the "classical" sense, or a modified sense, e.g. 4% of balance at the beginning of each year. The classical definition of SWR (4% of starting balance and increasing by inflation each year) has its weaknesses. You may want to check out a concept called Variable Percentage Withdrawal located here https://www.finiki.org/wiki/Variable_percentage_withdrawal that typically allows you to spend more money most of the time, but is based on variable amounts in 'down' years. The key thing is that one can switch on to, or switch out of, SWR or VPW concepts as you wish.


I guess when I actually know when I retire I will consult with my financial advisor for his recommendations. Thank you for the link to the Variable Percentage Withdrawal site.
I will study up on this. 

I guess this 4% withdrawal rate is something you see a lot of in articles in the paper, etc... To me , it's just a rough guide.

Thanks


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## AltaRed (Jun 8, 2009)

jman123 said:


> I guess this 4% withdrawal rate is something you see a lot of in articles in the paper, etc... To me , it's just a rough guide.
> 
> Thanks


Financial advisors often remain stuck on this concept, either by repetitively using it historically, or because it is a simple concept many people understand. It has both 'sequence of return' risk in event of a major market setback shortly after retirement, or can end in a large portfolio at death. Its vulnerabilities primarily lie with its rigidness. Just about everyone should use a modified form of it, adjusted each year, or perhaps only as a rough guide.


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## OhGreatGuru (May 24, 2009)

AltaRed said:


> I am pretty sure the pension income tax credit does apply under age 65 for qualified types of pension income, such as RRIF payments.
> ...


No. You have to read the fine print for lines 115 (See the Guide) and the federal worksheet for Line 314.. If you are under 65, T4RRIF payments are reported on line 130: if you are 65 or older on Line 115.


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## fireseeker (Jul 24, 2017)

OhGreatGuru said:


> No. You have to read the fine print for lines 115 (See the Guide) and the federal worksheet for Line 314.. If you are under 65, T4RRIF payments are reported on line 130: if you are 65 or older on Line 115.


Here is an excellent summary of this credit and how to use it from Tim Cestnick:
https://www.theglobeandmail.com/globe-investor/personal-finance/taxes/claim-the-pension-credit-and-avoid-retirement-brawls/article22350533/
He does say RRIF payments qualify for under-65s.


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## gardner (Feb 13, 2014)

From the article...



> If you're under 65, you can claim the credit if you have one of the following types of income: Annuity payments from a superannuation or pension plan, payments from a RRIF or annuity payments from an RRSP or DPSP *which have been received as a result of the death of a spouse or common-law partner*, and annuity payments from the SPP.


IE: under 65 you only qualify if it is a survivor benefit.


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## AltaRed (Jun 8, 2009)

> f you're under 65, you can claim the credit if you have one of the following types of income: Annuity payments from a superannuation or pension plan, payments from a RRIF or annuity payments from an RRSP or DPSP which have been received as a result of the death of a spouse or common-law partner, and annuity payments from the SPP.


Yeah, but look at the underlined part. Does that not stand alone?

However, I wonder if that also includes '*received as a result of pension income splitting from a spouse's RRIF payment*'.


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## fireseeker (Jul 24, 2017)

I think we've stumbled into a grammar/punctuation issue. I read Cestnick's piece the same way AR did -- that "payments from a RRIF" stood alone.
However, it appears Gardner is correct -- it has to be a survivor benefit.

https://retirehappy.ca/are-you-taking-advantage-of-the-pension/
http://www.advisor.ca/tax/tax-news/understanding-the-pension-income-tax-credit-141669


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## AltaRed (Jun 8, 2009)

So it appears. So...for the OP, his spouse cannot use the pension income tax credit until she is 65.


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