# Retired and drawing an income? What is your average tax rate?



## jmarks

Living in Alberta and thinking of retiring in 2014 (age 55.5). Both the wife and I will be drawing DB's (she wants to work another 2 years) and I want to spend my RRSP money to bridge my DB to 62 so I don't get penalized. We will live off her earning's until she retires.

Problem is all three retirement plans that various people draw up show me paying in the 34% tax bracket, while drawing $65k of RRSP money. I've told them all that seems a little high and found a few calculators on line that calculate the average tax rate and they seem to say I'll pay around 20% average on the amount stated.
For those drawing a pension, how much are you drawing and what is your average tax rate?


TIA


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## fraser

Marginal Rates:

http://www.kmss.ca/_pdfs/Tax-Information/2012-2013_Fed-AB_Marginal_Personal_Tax_Rate_Table.pdf

Tax Calculator:
http://www.ey.com/CA/en/Services/Tax/Tax-Calculators-2013-Personal-Tax


Your average tax rate will depend on your taxable income. Everyone is different.


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## piano mom

This is the main reason why my husband insists on retiring early so that he can start withdrawing from RRSP before the pensions kick in.


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## fraser

We review our tax position twice a year. In April when we file and again in November prior to year end.

Don't forget that you can transfer up to 50 percent of your DB income to a spouse.


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## jmarks

fraser said:


> We review our tax position twice a year. In April when we file and again in November prior to year end.
> 
> Don't forget that you can transfer up to 50 percent of your DB income to a spouse.


Thanks fraser, so I take it your a retiree and those numbers from the calculators you pointed me to are accurate?

I'm finding it a LOT harder than I thought it was going to be to pull the trigger on retirement. I think part of the reason is all the advice I'm getting from Advisor's/Salesman is confusing. e.g. why have me paying 34% tax when they know it will only be ~22% at $65k a year. When I brought that fact up one guy asked me what I wanted the tax rate to be!! and he wants to take care of my affairs !! 
And because the wife and I make very good salaries, they don't want to believe our budget is "so low". Even though they know a majority of our current income goes into savings!
*
piano mom*, bottom line for us is that once those pensions + gov. $$ start flowing we'll have way more $$ than we need, so why keep working when our odds of health issue's keeps rising as we age? Do the stuff we want to do NOW while we are healthy and if we stay healthy so be it, we will still have an excellent income from two DB's and gov. pension income!


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## pwm

I'm in Manitoba:
View attachment 343


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## fraser

They are not my numbers. They were just in there when I got to the web. 

To get your number on the tax calculator simply zero out the number and insert yours. It should be accurate, but don't forget to deduct your estimated tax credits.

The marginal tax rate chart is accurate.

Don't forget your 2K pension income deduction!


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## fraser

The one anomaly in the Alberta tax regime is the flat ten percent provincial tax rate. It really becomes obvious at higher income levels. The other provinces utilize a sliding scale.

In the year that we moved to Alberta from BC, my tax was 10K lower than if we had still been residing in BC. That, plus no sales tax and car insurance that was 25 percent lower on each of our vehicles was a very welcome change.


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## Retired Peasant

fraser said:


> Don't forget your 2K pension income deduction!


I don't believe that applies unless you're >=65 years old


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## OptsyEagle

> I want to spend my RRSP money to bridge my DB to 62 so I don't get penalized.


Just so you can do proper planning. There is no penalty. You will be giving up 7 full years of free money to get that extra amount ... you call a penalty. I am pretty sure that the amount of benefit you would get by starting your pension at age 55 is ACUARILY going to be the very same benefit you would get starting at age 62.


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## Eclectic12

OptsyEagle said:


> Just so you can do proper planning. There is no penalty...
> I am pretty sure that the amount of benefit you would get by starting your pension at age 55 is ACUARILY going to be the very same benefit you would get starting at age 62.


First there's a lot of variation in DB plans so YMMV.

Secondly - I'm not sure how to reconcile "it's the same benefit just paid earlier".
Under my DB plan rules, I'm earning the benefit at 1.7% of earnings per year but the reduction for each year early is 5%. 


Cheers


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## AltaRed

Eclectic12 said:


> Secondly - I'm not sure how to reconcile "it's the same benefit just paid earlier".
> Under my DB plan rules, I'm earning the benefit at 1.7% of earnings per year but the reduction for each year early is 5%.


That 5% discount is standard and is actuarially based. The 1.7% and 5% are totally different things. You earn 1.7% each year for as long as you work, e.g. 30 years. 

The 5% discount is because for every year before age 65 (or 60, or 62 or whatever your DB is), the plan is paying you money earlier than it would have planned to do so, thereby taking away the plan's ability to grow and compound (based on assumed performance/rate of return rates) until you turn 65, or 60 or whatever. Also it would otherwise pay you more money (e.g. 5 years more) than you are entitled to by the time you are actuarially dead at age 82 or so (e.g. 17 years after turning 65). That is a double whammy and has to be factored into the spread sheets to 'equalize' that impact.


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## jmarks

pwm said:


> I'm in Manitoba:
> View attachment 343


Hmm, that's an awfully low percentage of tax paid!! When I use the calculator (above) for $100k income in Manitoba the avg. rate is 30%. 
How does one go about getting it as low as yours?


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## jmarks

OptsyEagle said:


> Just so you can do proper planning. There is no penalty. You will be giving up 7 full years of free money to get that extra amount ... you call a penalty. I am pretty sure that the amount of benefit you would get by starting your pension at age 55 is ACUARILY going to be the very same benefit you would get starting at age 62.


Good point, my pension is reduced 6% age 55-58 then 3% from 59-62, so maybe drawing at some given point might be better than waiting until 62. 
This is all so confusing, maybe I should just work until I drop lol


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## OhGreatGuru

Retired Peasant said:


> I don't believe that applies unless you're >=65 years old



For a pension it applies at any age. 65 years old applies for RSP-Annuity payments or withdrawals from a RRIF.


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## pwm

jmarks: I know it's a low average rate. It's because the "taxable dividends" were $68,416 and the "dividend tax credit" was $10,275. Most of my income is from dividend paying Canadian corps. 

That calculator is quite crude and I presume it assumes all your income is in the form of salary and doesn't allow for any variation of income types.


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## AltaRed

http://www.taxtips.ca/calculators.htm# does a better job.


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## OptsyEagle

Eclectic12 said:


> First there's a lot of variation in DB plans so YMMV.
> 
> Secondly - I'm not sure how to reconcile "it's the same benefit just paid earlier".
> Under my DB plan rules, I'm earning the benefit at 1.7% of earnings per year but the reduction for each year early is 5%.
> Cheers


You don't need to reconcile it, they already have. Obviously money doesn't grow on trees so you need to know that you have accumulated a certain benefit at this point in time. All they are doing is asking you how you want to receive that benefit. Now not knowing when you are going to die and how much might be paid to a spouse and for how long, etc., they take the actuarial average and work out a system so they pay out the same amount, whether you decide to take it early or late.

5% per year sounds like a lot but so does turning your back on 7 full years of pension payments. You don't get to live 7 years longer when you decide to do this. That money is gone. Well actually it is just paid to you later in larger pension payments...provided you are the lucky one to live longer then average ...as opposed to the other half of the population that get to live less then the average.

In any event, if all you do is look at your pension reduction for early retirement, as a penalty to be avoided, you may be missing some useful planning opportunity.


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## Retired Peasant

OhGreatGuru said:


> For a pension it applies at any age. 65 years old applies for RSP-Annuity payments or withdrawals from a RRIF.


Yes I was aware of that. The OP said they wanted to withdraw from their RRSP to bridge. So the Pension credit wouldn't apply.


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## fraser

You really do need to understand your particular DB plan. They are all very different.

I had a plan that allowed me to take full pension at age 62 (no penalty) providing that I was over 55 years old and had at least 10 years service. Our company downsized for 20 years or so. For people in the DB plan, making it past 55 was a key incremental benefit. 

The plan called for a 5 percent per year reduction for every year that I took the pension early. BUT there was also a provision for a reduced penalty to 3 percent if my age and service equaled 85.

And if my age and service equalled 90 (unfortunately it did not) I was also entitled to an additional monthly bridge amount from age 62 to age 65 of $14 per month times years of service. Thirty years of service would have provided a monthly bridge at age 62 of $420 and would be reduced by 3 percent for every year that I took the pension before age 62.

So, in my case, I delayed taking the pension entitlement for a year or simply because it reduced the early penalty from 5 percent to 3 percent. That is a substantial saving assuming I draw the pension for 25 years.

Our pension dept. was outsourced. The outsourcer was either not as familiar with the pension as they should have been (relatively small number of active employees in the plan) or my former employer did not provide them with all of the correct data. In either case, my current monthly pension is quite a bit larger that what was first quoted to me. I read the plan and the subsequent amendments and challenged a number of items such as the 3 percent rule, what 'pensionable income' consists of according to the plan, etc. Some of these benefits were not spelled out properly in the pension communications-especially certain supplementary amounts.

Bottom line...understand your plan before you resign and before you actually take the pension entitlement. The only person who really cares about your financial well being is YOU.


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## jmarks

Thanks so much for the conversation ! I really thought retirement and planning was going to be easy. And it was until I turned 55 and vested in my pension plan and a decent amount of savings and no debt. The reality is that I'm scared. 
The advice I've been given to date is biased(banks and investment advisors) and it feel like I'm being played by people wanting to sell me their financial products. 

Does anyone know of a good, for fee retirement planner in Alberta, preferable in Red Deer? Or even someone I could send my plan to that would comment on it? 

Thanks everyone for the conversation, it's great to hear your view points and knowledge!


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## Mookie

fraser said:


> Bottom line...understand your plan before you resign and before you actually take the pension entitlement. The only person who really cares about your financial well being is YOU.


Totally agree - don't assume your Pension or HR dept knows what they're doing. 

When I was laid off about 18 months ago, first they terminated me out of the pension plan early (while I was still contributing to the plan through income continuance payments!!), then they shorted me by about $3500 on my final severance, then over a year later I got a letter from them saying that they overpaid me $18,000, and they wanted their money back immediately!!!

All of these were screw-ups by the HR or pension depts. If I didn't understand what I was entitled to, or was too lazy to double check the numbers, it would have cost me a small fortune.


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## fraser

Absolutely.

And I would highly recommend that people in DB plans keep all company DB plan communication documents.

I retained a document from 1996 that was immensely helpful in describing exactly what was included in pensionable income. It proved invaluable to me in securing a substantially larger entitlement.


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## Arshes76

jmarks said:


> Living in Alberta and thinking of retiring in 2014 (age 55.5). Both the wife and I will be drawing DB's (she wants to work another 2 years) and I want to spend my RRSP money to bridge my DB to 62 so I don't get penalized. We will live off her earning's until she retires.
> 
> Problem is all three retirement plans that various people draw up show me paying in the 34% tax bracket, while drawing $65k of RRSP money. I've told them all that seems a little high and found a few calculators on line that calculate the average tax rate and they seem to say I'll pay around 20% average on the amount stated.
> For those drawing a pension, how much are you drawing and what is your average tax rate?
> 
> 
> TIA


Tax brackets and average tax rates are two different things, they way i interpret it. You can be in the 30% tax bracket but pay an average of 20%. You need to get clarification on that.


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## Eclectic12

jmarks said:


> Living in Alberta and thinking of retiring in 2014 (age 55.5). Both the wife and I will be drawing DB's (she wants to work another 2 years) and I want to spend my RRSP money to bridge my DB to 62 so I don't get penalized. We will live off her earning's until she retires.
> 
> Problem is all three retirement plans that various people draw up show me paying in the 34% tax bracket, while drawing $65k of RRSP money ...


 ... if you are doubting the numbers - maybe it's worth downloading one of the free tax software packages or spreadsheets and plugging in the pension numbers (as well as what you plan for charitable donations etc.). 

It will be off a bit due to using 2013 tax info but it would be a way to catch items such as charitable donations that the retirement plans are not taking into account.


Cheers


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