Retirees who aren’t winter sports enthusiasts may find the shorter, colder days of winter a bad time to begin their next phase.Halfpoint/iStockPhoto / Getty Images
More Canadians retire in December than any other month, according to Statistics Canada, a timing that offers advantages for tax planning while making the emotional side more difficult for some.
Adam Chapman, certified financial planner (CFP) at YESmoney in London, Ont., says many clients will kick off a December retirement with a big trip or event. But once they’re home and reality sets in, waking up in the dark and experiencing shorter, colder days can be difficult, he says, especially if they aren’t winter sports people.
“They typically find there’s not enough momentum getting out of the gates,” he says of clients trying to figure out how to spend their days.
However, a December retirement makes designing a client’s income stream substantially easier, says Greg Keith, CFP at Wealth Plan Atlantic Inc. in Saint John.
“You have a clean slate from a tax perspective,” he notes.
New retirees shift from their employee paycheque structure, with all taxes withheld, to receiving income from multiple sources, including workplace and government pensions as well as investments. Starting with a new tax year allows the advisor and client time to figure out the tax consequences and timing of withdrawals from specific income streams.
Compare that to retiring in the summer, when a client is introducing their pension and other income on top of the employment income they’ve already earned for part of the year. Receiving Old Age Security for the first time at the end of the year, Mr. Keith says, on top of all the income received earlier in the year, could trigger a clawback of the government entitlement.
Clients who retire later in the year may also find themselves paying taxes at a higher marginal rate, he says. “That’s why some choose the end of the year, so they can start with a fresh tax year.”
December retirements also create tax planning opportunities, Mr. Chapman says. He gives the example of one spouse retiring in December while the other spouse is still working. The retiree may not require any money right away, with the couple planning to live on the working spouse’s income to start. In that situation, the retiring spouse could withdraw income from their RRSP in January – a low enough amount that they’re not paying taxes – and then make an RRSP contribution to reduce their final working year’s income.
Mr. Chapman also notes that setting up a RRIF is easier at the end of a tax year, as the minimum withdrawal amount is calculated in January.
“Setting up your income-producing accounts at the end of the year also gives you greater control over the withholding taxes collected the following year when you’re drawing income,” he adds.
Year-end wrinkles
That’s not to say every December retirement goes smoothly. Mr. Keith gives the example of a client getting downsized. If the company insists on a lump-sum severance payout and doesn’t allow the amount to be pushed into the following taxation year, that could move the client into a higher tax bracket.
“There are limits to what you can do unless they do give you options,” Mr. Keith says.
Receiving bonuses or commissions can be another issue for a client deciding whether to retire in December or to wait a few more months, says Mutaz Dirar, financial advisor at Edward Jones in Waterdown, Ont.
Depending on a company’s fiscal year-end, he says, some companies pay bonuses in the first quarter of the new year.
“If the person retired in December before their bonus pays out, they’re not going to get that bonus,” he says. “If the bonus will be significant, it’s something to think about.”
In that situation, clients may wait to receive that money, Mr. Dirar says, noting that retiring early in the year will still provide the client with more options.