# Tax Efficiency Ideas for Retirement Income Sources before Pension kicks in?



## milhouse (Nov 16, 2016)

Hoping to present kind of a case study for ideas / discussion. 

My friend is turning 57 and is looking to retire early this year. He sounds to have a good DB pension that will support his spending but shouldn't tap into it until age 60 to get the most benefit. From age 57 to 60, he has a bit more than enough RRSP savings to cover his spend for 3 years until his pension kicks in. Taxable investments and TFSA savings are limited and probably can likely only provide a bit of cash flow. 
He also has a house with 10+ years left on his mortgage due to a divorce that's generating some rental suite income. 

His RBC advisor's main advice is around RRSP withdrawals to try to stay within lower tax brackets and small withdrawals to limit the withholding tax. Apparently the advisor says RBC doesn't charge any fees for RRSP withdrawals (??). 

Considering my friend's income during the 3 years before his DB pension kicks in will mainly be from rental income and RRSP withdrawals, is there's much more he can do to limit taxes? I suppose he might be able to tap into his taxable and TFSA savings to provide a few dollars to keep him below a tax bracket if he's borderline. 

One radical idea I had was that maybe they could use the Smith Maneuver to generate some tax deductible interest payments for them. But it might be too risky for them at their age heading into retirement and how volatile the markets are at the moment. 

Any comments or suggestions?


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## My Own Advisor (Sep 24, 2012)

You're already onto the things I would suggest....

1. Withdrawal from RRSP, deplete and defer DB pension for a few years. See #4 below with any RRSP withdrawals not spent. 
2. Defer taking CPP to maximize benefits/defer taxation on that.
3. Consider deferring OAS after 65 - although may not be required.
4. Use the Dividend Tax Credit to the extent possible before DB pension kicks in.
5. Consider withdrawing from TFSAs and apply for GIS with OAS, since TFSA income is not income tested.
https://www.moneysense.ca/save/investing/tfsa/key-to-rich-qualifying-for-gis-is-large-tfsa/

As far as I know, there is no small fee (e.g., $25) for any RRSP withdrawals with Royal Circle / RBC Direct.

I wouldn't get into the SM in your 50s or 60s - that's for asset accumulation not decumulation but that's just me maybe!

From what I know Millhouse, your friend is in good hands with your help.


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## Jimmy (May 19, 2017)

There is the Pension tax credit. He could wdraw $2,000 and get a tax credit of $300 (15%). So if his income is low enough he would be withdrawing it and paying only ~ 5% tax. ON combined rate is 20% up to about $43,000 in income. also would be 3 more yrs of getting this credit vs delaying his pension to 60.

https://retirehappy.ca/are-you-taking-advantage-of-the-pension/


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## Retiredguy (Jul 24, 2013)

I see you're in greater Vancouver so assume your friend is too. He's eligible as he's in BC to defer property taxes which is done at a very favourable rate, of simple as opposed to compound, interest. Just another option to think about.


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## Retiredguy (Jul 24, 2013)

Withdraw it from where and how does it make him eligible?


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## milhouse (Nov 16, 2016)

Thanks for the feedback/suggestions.



My Own Advisor said:


> You're already onto the things I would suggest....
> 
> 1. Withdrawal from RRSP, deplete and defer DB pension for a few years. See #4 below with any RRSP withdrawals not spent.
> 2. Defer taking CPP to maximize benefits/defer taxation on that.
> ...


Not sure if they can defer CPP as they will lose their DB pension's bridge benefit at 65. Not sure if taking OAS will be enough to cover the gap if he delays CPP.
I agree trying to maximize the DTC would be beneficial. Just not sure how he would be able to build their dividend income. Have to brainstorm about this more.
Not enough TFSA money and too great of a cash flow need due to the mortgage to be able to qualify for GIS. 
Yeah, I'll likely mention the SM just as a talking point to brainstorm but not sure if it's the right thing for them. He just has too much capital tied up in the home without it generating enough cashflow. 



Jimmy said:


> There is the Pension tax credit. He could wdraw $2,000 and get a tax credit of $300 (15%). So if his income is low enough he would be withdrawing it and paying only ~ 5% tax. ON combined rate is 20% up to about $43,000 in income. also would be 3 more yrs of getting this credit vs delaying his pension to 60.


Since they're under 65, I don't think their retirement income sources (eg RRSP) qualify for the pension tax credit does it??



Retiredguy said:


> I see you're in greater Vancouver so assume your friend is too. He's eligible as he's in BC to defer property taxes which is done at a very favourable rate, of simple as opposed to compound, interest. Just another option to think about.


Good idea. They're already taking advantage of it.


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## Jimmy (May 19, 2017)

milhouse said:


> Thanks for the feedback/suggestions.
> Since they're under 65, I don't think their retirement income sources (eg RRSP) qualify for the pension tax credit does it??


If he wanted to wdraw from his pension it could apply. 



> The Pension Income Tax credit is available to you if you are 55 years of age or older.
> 
> If you are younger than 65 for the entire year: Pension income includes:
> 
> Income from a superannuation or pension plan


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## Eclectic12 (Oct 20, 2010)

milhouse said:


> ... Considering my friend's income during the 3 years before his DB pension kicks in will mainly be from rental income and RRSP withdrawals, is there's much more he can do to limit taxes?


If he can find REITs that he likes the financials as well as the prospects for that pay close to 100% RoC, until the ABC becomes negative, the RoC paid is tax free. If the RoC does become taxable, it is CG so in most tax jurisdictions, it is tax advantaged.

The key is to make the the REIT is a good investment first before considering the tax breakdown.


After that I would think that eligible dividends would be helpful.


Cheers


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## milhouse (Nov 16, 2016)

Jimmy said:


> If he wanted to wdraw from his pension it could apply.


Sorry, you're right. 
While the pension credit will help, I don't think it would offset the impact of taking the DB pension before 60. 



Eclectic12 said:


> If he can find REITs that he likes the financials as well as the prospects for that pay close to 100% RoC, until the ABC becomes negative, the RoC paid is tax free. If the RoC does become taxable, it is CG so in most tax jurisdictions, it is tax advantaged.
> 
> The key is to make the the REIT is a good investment first before considering the tax breakdown.


Thanks for the suggestion on the REITs. Will pass along that as an option too.


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## Longtimeago (Aug 8, 2018)

I'll go to the other side of the equation.

In retirement, early or not, expenses are as important as income obviously. I for one would not be going into retirement with 10 years of mortgage on the expenses side of that equation. Yet something like 25% of Canadians still have a mortgage when they retire, early or not. 

There is a saying I always like to bring up when people are talking about retirement. That saying is, 'you can't see there from here.' For example, most people live where they live either because they always have or because of proximity to where they work. They have never given any real thought to living anywhere else. But when you retire, you can live anywhere you can afford. That is a big difference. You can sell a one bedroom condo in a major city and have enough capital to buy 3 detached homes in some other part of the country. That's a fact. 

When you are working for a living, things like your food bills, clothing, gasoline, etc. etc. are all likely to be higher than in retirement but until you are 'there' rather than 'here' where you are now, you may not even be able to guess at how different they can be. 

I find most people over estimate the amount of income they will need in retirement and ALL of the suggested means of estimating that over estimate it. The only way that they might not over estimate it is if nothing changes at all in what people spend. If someone has the same income both before and after retirement, what usually happens is that they spend it differently. Some expenses go down while 'discretionary' spending is able to go up. 

So while looking to maximize income with better tax planning etc. are always worth doing, it is at least as important to start looking at the expense side of the ledger. My first advice would be to look at getting rid of the mortgage if at all possible by moving. I always consider being mortgage(as well as any other form of debt) free as the first step in a successful early retirement. Doing that not only removes the mortgage expense it is also likely to reduce a lot of the associated expenses like property taxes etc.


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## Eclectic12 (Oct 20, 2010)

milhouse said:


> ... Thanks for the suggestion on the REITs. Will pass along that as an option too.


It made it easier to pay off my mortgage early where I could send 90% to the mortgage, with almost no concern about a future tax bill. As well, where the REIT is maintaining the building, there won't be a depletion that is normally associated with RoC. http://howtoinvestonline.blogspot.com/2010/07/return-of-capital-separating-good-from.html

In a taxable account, there will be some bookkeeping to find out how much is RoC then remember to deduct this amount from the cost base. Where one is comfortable with a spreadsheet, it doesn't take long to look out that year's breakdown then apply that to what was paid (assuming no sells or buys during the year ... though those are more tedious than difficult to adjust for).


Cheers


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## Longtimeago (Aug 8, 2018)

I will also go to the other side of the equation when it comes to deferring pension income.

Deferring a pension is a bet. If you defer, you are betting you will be paid more for long enough that it totals more than if you did not defer. In other words, you are betting you will live longer in order to enjoy a financial benefit by doing so. But is it the right bet?

I decided to take CPP at age 60 rather than even wait till age 65. By my calculations, I would have to live to at least age 80 before deferring it to 65 would start to result in my gaining anything meaningful financially by waiting. 

But a more important part of my thinking in that regard was around the simple fact that unless we suffer from bad health, we tend to spend less as we get older. We spend less simply because we are less able physically to do things we do when we are younger and we've done a lot of what we wanted to do already and have no desire to do them again etc. 

I also believe that every year we enjoy retirement early is worth several years vs. later. What I mean is that if you retire before age 60 say, what you can do with a year at that age, is likely to be several times what you can do at a later age. I retired quite early and my wife at age 52. What we did in the 13 years before she reached age 65 is far beyond what we would ever have been able to do after age 65 just from a physical point of view even though we are both in very good health. Having the income early to do what we did was worth not deferring pension income till we were too old to enjoy it as much. I don't know if I am explaining it very well but I hope it makes some sense to those reading.

Having $500 a month to spend at age 60 is worth more than having $1000 a month to spend at age 70. In a sense, what I am saying is that where we could easily find ways to spend $500 at age 60, we don't even need to spend $500 at age 70 and having $1000 would not change that at all. Time is one thing you cannot bank and so the earlier you retire and start doing things you want to do, the better. Having more money when you are too old to do anything is pointless.


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## milhouse (Nov 16, 2016)

Yes, this discussion has been had. I want to be supportive but don't want to push them too hard.
I've told him to get a better understanding of their expenses but he's struggling to do a deeper dive. He's done a high level estimate based on his current employment income, what he's saving, and where his account balances end up every year. 
I'm not sure what's holding him back from selling the house. It's definitely too much house for just him. It might be to give the kids an option to stay there if they wanted/needed. Maybe sentimental value. I think he's lived there for like 25-30 years. He likes to have friends over and entertain. I also don't want to be a hypocrite either by nagging him to sell his place having been a beneficiary of his parties. 

Just to level set for anyone reading the thread, it is also not _necessarily_ an issue of not having enough retirement income sources. However, it wouldn't hurt for him to review his spending requirements as it's _all tied together_, supplying income to support his spend. His RRSP's and rental income should support his spending needs for the next 3 years before his pension kicks in and maintain his current lifestyle. It's the taxation levels due to his required retirement income level that are killer. But obviously if he didn't have to support the mortgage, then their retirement income could be less and reside at a lower tax bracket.


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## Prairie Guy (Oct 30, 2018)

I agree longtimeago...the time value of money is often overlooked. I retired a couple months before my 54th birthday because I decided that I had enough and wasn't interested in having more if it required going to work every day.

I'll also probably take CPP at 60 and enjoy the 15 years of extra money. If I ever make it to 75 I probably won't care that I missed out a little extra.


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## ian (Jun 18, 2016)

Agree on paying down the mortgage assuming his/her after tax rate of return on investments is lower than the mortgage interest rate. Which it probably is.

Your friend might be well advised to spend a little money with a good financial planner or tax accountant to map out a course over the next few years. We did this from a tax perspective seven years ago. Very high payback for both of us AND the fee was bundled into our tax prep fees so we wrote it off.


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## milhouse (Nov 16, 2016)

Yeah, I wonder if there's a way to burn down the mortgage a bit faster, just as a matter of reducing income needs during his 60's since it's not going to be paid off within the next couple of years. 

WRT to a good financial planner or tax accountant to map out the course over the next few years, that's exactly what he needs. I don't think his RBC advisor is up to the task. But he also needs a better grasp of his cash flow to allow for a comprehensive analysis.


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## ian (Jun 18, 2016)

I would DEFINiTELY not depend on an RBC or any bank advisor. If the advisor is anything like our previous s CIBC so called Imperial Service advisors the goal will be to either put him into high MER RBC funds or switch him to a a 1 percent fee for service plan. Next comes rotating advisors who really do not know much other than reading their weekly update advice sheets. Someone new every 6-12 months. And really zilch when it come to personal tax issues.

Ask around, pay some money to a professional and get it done right. Determine the best tax strategy, the best draw down strategy in order to minimize tax, maximize DB, CPP, etc, and allow for inflation over the next few years. Then have it all reviewed/updated a few years later. I started down this path a few yeas prior to early retirement. The first tax go round resulted in a fee of $300 ($1800 after tax), revised filing going back for each of six years us, a tax refunds totaling $10K. After that is mapping out a future course to get the maximum benefits, net of taxes, from our combined resources. 

We believe that the payback and peace of mind was well worth the fee, not to mention the tax savings going forward to this day.


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## Retiredguy (Jul 24, 2013)

re post


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## Retiredguy (Jul 24, 2013)

ignore


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## Retiredguy (Jul 24, 2013)

Jimmy said:


> If he wanted to wdraw from his pension it could apply.


Agree and was aware that if he started his DB pension it would get him the credit. Just was confused by your suggestion that he withdraw 2k cash from his pension and that would somehow get him the credit.


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## Longtimeago (Aug 8, 2018)

milhouse said:


> Yes, this discussion has been had. I want to be supportive but don't want to push them too hard.
> I've told him to get a better understanding of their expenses but he's struggling to do a deeper dive. He's done a high level estimate based on his current employment income, what he's saving, and where his account balances end up every year.
> I'm not sure what's holding him back from selling the house. It's definitely too much house for just him. It might be to give the kids an option to stay there if they wanted/needed. Maybe sentimental value. I think he's lived there for like 25-30 years. He likes to have friends over and entertain. I also don't want to be a hypocrite either by nagging him to sell his place having been a beneficiary of his parties.
> 
> Just to level set for anyone reading the thread, it is also not _necessarily_ an issue of not having enough retirement income sources. However, it wouldn't hurt for him to review his spending requirements as it's _all tied together_, supplying income to support his spend. His RRSP's and rental income should support his spending needs for the next 3 years before his pension kicks in and maintain his current lifestyle. It's the taxation levels due to his required retirement income level that are killer. But obviously if he didn't have to support the mortgage, then their retirement income could be less and reside at a lower tax bracket.


I agree with the advice to talk to a professional but that will not get him advice on whether to sell up and move or not. The professional can only work with the situation as it is presented. 

My focus would be 100% on getting rid of the mortgage and getting a real handle on actual expenses anticipated after retiring. You refer to 'he' and you refer to 'they', which is it? Someone who is retiring as a single man has different criteria from a couple.

Let me give you an real example I am familiar with. Someone I know well was a single man living in a downtown 1 bedroom 600 sq. ft. +/- condo. He retired in his early 50s with no mortgage and is not a profligate spender at all. He planned to live off investment income, RRSP withdrawals and savings, until his pensions would start to kick in. He made it to 59 at which point, it was getting really tight moneywise for him. To the point that he was having to worry about 'what if the dishwasher' or something broke down and he needed to buy a new one. Remember, this is someone with no mortgage but with monthly condo fees which amounts to much the same thing.

So he was pretty much forced to bite the bullet and move and to do so quickly. He moved to a small town and is the proof of what I said earlier that you can sell a condo in the city and buy 3 detached houses in a small town. He bought a detached 2 bedroom (one person remember) house for 1/3 of what he sold the condo for. That left 2/3 to invest and provide additional income. When he took his CPP and company DB pension at age 60, his income was then well in excess of his expenses. By the time he got to OAS at age 65, not being a big spender, he had more than he knew what to do with.

I believe in the 'Rule of 3s' for many things including retirement. Applied to retiring, what it says to you is that you should spend 1/3 of income on expenses, 1/3 on discretionary spending (which would include a new dishwasher) and have 1/3 for savings. If you do that, it isn't hard to see that it would be very unlikely that you would ever have a financial problem with that formula. You have in effect a 2/3 cushion to work with. What many people do unfortunately is work with a much tighter distribution of income that allows only a small cushion if something goes wrong. When you retire and particularly early, you want to enjoy being free, not constantly worrying about 'what if' something goes wrong. Leaving behind the stresses of working for a living only to exchange them for financial stresses of not working makes no sense whatsoever. 

A lot of people will say, 'well yeah, thirds like that would be nice but to do that I would have to have a lot more income to start with.' I disagree. What you would have to do is control your expenses to match 1/3 of the income you have. Most people look at it the other way around. They start out by saying, 'I need X income for expenses, so to follow the Rule of 3's, I would need 3 times X of income.' That is the wrong way to look at it.

When you write, "I've told him to get a better understanding of their expenses but he's struggling to do a deeper dive. He's done a high level estimate based on his current employment income, what he's saving, and where his account balances end up every year.", that to me is the wrong path entirely. I would advise him to start by determining what income he will have when he retires. It is far easier to figure that out and a professional can definitely help him do that. NO advisor however, can tell you how much you will spend.

Once he knows what income he can expect to have and how it will change as he reaches the ages where pensions will kick in, he can then decide what he can AFFORD to spend. 

So lets, take some simple numbers as an example. Suppose he says, I can generate $30k income if I retire today at age 57. At age 60, I can expect to add CPP and a DB pension from employment which will increase my income then to $55k and at age 65 I will get OAS which will increase my total income to $60k. It is not reasonable for me to try to follow the Rule of 3s exactly, until I get to age 65. When I reach the maximum income though I can follow the rule if my expenses are $20k or less.

Next step. If I accept those numbers for income, then I need to start living on $20k in expenses from day ONE. I will only have a $10k cushion in year one through 3 but it will increase as time goes on. At no time will I really feel any financial stress at all. See the difference in that approach? You don't try to say, 'how much income do I need', you say, how much in expenses can I afford on the income I have.'

So your guy says, well, I can't afford to pay my mortgage if I have to stay under $20k in expenses. Yup, that's right, so what's the next logical conclusion? You can't afford to have a mortgage. It's gotta go. So what follows from that? So how do I get rid of the mortgage? The point is that it leads you down an entirely different path of looking at everything.


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## Longtimeago (Aug 8, 2018)

Prairie Guy said:


> I agree longtimeago...the time value of money is often overlooked. I retired a couple months before my 54th birthday because I decided that I had enough and wasn't interested in having more if it required going to work every day.
> 
> I'll also probably take CPP at 60 and enjoy the 15 years of extra money. If I ever make it to 75 I probably won't care that I missed out a little extra.


I would change the, "the time value of money is often overlooked.", to, the value of time is often overlooked. In fact, you can't put a dollar value on time at all except in terms of work. But anyone can put a relative VALUE on time if asked the right question and interestingly enough, if you do ask the right question the answer is almost universally similar. What is the value of that single minute you spent watching the sun set with your partner? Answer, beyond measure. 

Leave 'money' out of it, it has nothing to do with the value of time. The value of time is in how you use it.


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## Jimmy (May 19, 2017)

Retiredguy said:


> Agree and was aware that if he started his DB pension it would get him the credit. Just was confused by your suggestion that he withdraw 2k cash from his pension and that would somehow get him the credit.


I meant by 'withdrawing' to start drawing on his pension and have pension income of $2,000/yr. Then he could use the credit and pay almost no tax on that $2,000 (credit is 15%). Each year he delays the pension, he loses that the yearly Pension tax credit available.


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## milhouse (Nov 16, 2016)

Longtimeago said:


> My focus would be 100% on getting rid of the mortgage and getting a real handle on actual expenses anticipated after retiring. You refer to 'he' and you refer to 'they', which is it?


Sorry for the confusion. It's just a single male. I try to generally write in gender neutral terms, in part due to a transgender coworker who prefers to be referenced in gender neutral terms. 



Longtimeago said:


> When you write, "I've told him to get a better understanding of their expenses but he's struggling to do a deeper dive. He's done a high level estimate based on his current employment income, what he's saving, and where his account balances end up every year.", that to me is the wrong path entirely. I would advise him to start by determining what income he will have when he retires. It is far easier to figure that out and a professional can definitely help him do that. NO advisor however, can tell you how much you will spend.


He's got his potential income sources identified. And based on _rough_ calculations and estimates, it will support his current spend. However, he's going to be taxed into the 30%+ bracket. His advisor's main guidance has apparently been to limit his cashflow so he stays in the low 20's versus how to maintain a higher cashflow while being able to stay in a lower tax bracket. 
His DB pension (from previous public sector employer) seems to be very good and I think will completely replace his current income (from a different employer) which meets their needs from a high level perspective. I don't think long term cashflow meeting his future needs is the issue. As the title states, it's more about tax efficiency from his other retirement sources before his pension kicks in 3 years from now. 

I have to digest the nuts and bolts of your comments a bit later as I'm running late for something. 
Thanks for the detailed response.


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