While the government of Canada mandates certain actions at these ages, there is some flexibility to make the best financial decisions for yourself and your family.
Here are some questions to ask yourself when you reach the age of 65 – and tax saving tips when you reach age 71 – to help you determine what steps you need to take and what steps you want to take when you achieve these pivotal years.
Five Questions to Ask at 65:
1. Should I Start Taking CPP Now?
Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) retirement benefits are generally paid to people 65 years or over who have contributed to the plan. You can start to receive CPP or QPP at any time now, but the longer you wait (up to age 70), the higher your monthly payment will be.
Why Take CPP Now
CPP and QPP retirement benefits are set up to start at age 65, but you have the option to start taking these payments early or late. If you can use the income now to create the retirement paycheque you need, there’s no penalty for starting these payments at this time. These payments are not subject to claw-back based on your income level, and you can share this income with your spouse and possibly reduce your family’s overall tax bill.
If you decide to hold off on your CPP entitlement, your payments will permanently increase by 0.7% for each month that you delay receiving CPP after age 65, up to age 70. If you’re still working, or your other retirement income sources provide you with the funds you need, it may be worth delaying your payment.
2. Should I Apply for OAS?
The amount of Old Age Security (OAS) you receive is based on how long you have lived in Canada after age 18 and may be partially or fully clawed back if you earn above a certain amount. If you are still employed or expecting other sources to offer significant income at this point of your life, you may want to postpone taking your OAS
3. Should I Convert My RRSP to a RRIF?
Your Registered Retirement Savings Plan (RRSP) may represent a significant source of income once you retire. While you can convert your RRSP to a Registered Retirement Income Fund (RRIF) at any time before you turn 71, it’s important to keep in mind that once you do, you are obligated to take a minimum payment from it every year.If you’re able to hold off converting at this time, you may want to continue contributing to your RRSP and putting off the conversion—and your mandatory annual withdrawal.
4. What Should I Do About My Pension Plan?
If you have a pension plan through your employer, you may have several options when it comes to when you will receive the money, how much you will receive, and how your spouse and children may be affected. Understanding what your options are will help you make the best decision for your individual circumstances.
5. How Can I Save on Taxes?
When you turn 65, you can start enjoying certain tax benefits that come into play at this age. You can also continue to make use of tax advantages that will apply for the next 6 years.
Tax Savings Tips
Pension income splitting: When you are 65 or over, you can begin splitting RRIF and Life Income Fund (LIF) income to help reduce your family’s overall tax bill.RRSP contributions: While you may have reached 71 and can no longer contribute to your own RRSP, if you have a younger spouse, you can contribute to their spousal RRSP to continue growing savings on a tax–deferred basis.TFSA contributions: In a Tax–Free Savings Account (TFSA), all investment income and withdrawals are tax–free and do not affect your eligibility to receive government benefits such as OAS. What’s more, a TFSA can be used to shelter money that you currently don’t need—such as your entire mandatory minimum RRIF payment
Five Tips When You Turn 71:
1. Top up Your RRSP
Before the end of the year, make your final Registered Retirement Savings Plan (RRSP) contribution—and make it as large as you can. Keep in mind, you don’t have until March of the following year—your contribution must be made by December 31.
2. Consider Over–Contributing
If you earned income this year, you may want to over–contribute to your plan in December before you wind it down. The amount would be whatever you’re entitled to contribute based on your earned income.While you will have to pay a 1% penalty for the month of December on the over–contribution, the tax savings will far outweigh the penalty.
3. Have Unused Contribution Room? This Is Your Last Chance
If you have unused contributions from previous years, now is the time to catch up and max out, if you can.
4. Continue Contributing to Your Spouse’s RRSP
If your spouse is not yet 71, you can keep contributing to his/her RRSP until they turn 71, provided they have the contribution room.
5. Delay Withdrawing From Your RRIF
If you like, you can put off withdrawing from your Registered Retirement Income Fund (RRIF) until the end of the calendar year after it is set up. That means your savings will have more time to grow on a tax-deferred basis.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.