When I was in high school, I played on a few teams \u2013 including the debate team. I remember the time a kid had to argue that the earth was flat and debated me on that point. He eventually walked angrily out of the room saying that he\u2019d travel to the edge of the earth to prove me wrong. I knew he\u2019d come around, eventually. <\/p>\n
Another topic of great debate is how to best draw income in retirement. I wrote about this last week, sharing one person\u2019s example and an approach to planning retirement income. There were plenty of comments online \u2013 and some good ones at that. There was also some confusion around a few issues. <\/p>\n
Given the interest, I think it\u2019s worth talking about the topic this week and next. Let\u2019s expand on a few points and clarify some issues.<\/p>\n
Single or couple<\/p>\n
In my example last week, I shared the story of William \u2013 a man in his mid-sixties. If you happened to be married or have a common-law partner (I\u2019ll use the term \u201cspouse\u201d to keep it simple), it would be easy to assume that the example is not relevant. But remember, we file tax returns separately as Canadians. If each spouse is looking to minimize the tax on the income they draw in retirement, as William did, you\u2019ll be in good shape as a couple.<\/p>\n
Where you need to think about planning together is when there\u2019s an opportunity to split income. You\u2019ll be able, for example, to have up to one half of your eligible pension income (most commonly benefits from a registered pension plan, and withdrawals from a registered retirement income fund, and certain other plans) taxed in the hands of your spouse. This will affect which tax bracket you fall into (see my article <\/a>last week for more on tax bracket management).<\/p>\n Role of a corporation<\/p>\n Is it really worth setting up a corporation solely for the purpose of earning consulting or similar income in your later years, and thereby control your personal income? It depends. If you can earn enough income over several years where you\u2019re able to leave $30,000 to $40,000 each year in the corporation and not withdraw those funds, the deferral of tax on that money left in the corporation can be valuable. The costs of administration and tax filings could be covered by the taxes deferred. But speak to a tax professional to do the math for you. <\/p>\n The corporation can especially make sense if you\u2019re using it for other purposes as well, like completing an estate freeze, minimizing U.S. estate taxes, or providing protection from potential liability. And if you already have a corporation and don\u2019t need to set one up, then it\u2019s an even easier decision.<\/p>\n As an aside, your incorporated business will be entitled to a deduction for any reasonable costs incurred to earn income from your business \u2013 including things you\u2019re paying for anyway, like home office and vehicle costs (unless it\u2019s a personal services business (PSB), which generally won\u2019t be the case if you\u2019re working for more than one customer or client; avoiding PSB status should not be difficult).<\/p>\n Estate planning issues<\/p>\n When you contemplate how to draw tax-efficient income in retirement, there\u2019s also a need to consider the impact your approach has on your estate planning. Is your goal to maximize what you leave the kids? For some, this is a priority. For others, they\u2019d rather enjoy life today and aren\u2019t concerned about what they leave to the next generation.<\/p>\n If you want to leave more to the kids, you might consider making withdrawals early from your registered retirement savings plan (RRSP) or registered retirement income fund (RRIF) if you\u2019re in a lower tax bracket today than you\u2019ll be upon death. You could gradually transfer those funds to your TFSA. (see my article <\/a>from Sept. 20, 2023).<\/p>\n If you own a corporation that provides income in retirement, you\u2019ll need to think about the double-tax problem that can arise at the time of death (see my article <\/a>from Sept. 11, 2024). There are ways to solve the issue \u2013 but be aware of it.<\/p>\n Needs in retirement<\/p>\n My article last week didn\u2019t address the shifting needs of folks as they get older. And it\u2019s true, as one reader observed, that women typically live longer than men and this could affect not only how long your investments need to last, but the amount that is spent each year on long-term care costs.<\/p>\n There\u2019s also a psychological reality that switching from being a saver of capital to a spender can be a tough adjustment for many. As one reader suggested \u201cenjoy your life\u201d and \u201clive well,\u201d but \u201cspend the money wisely.\u201d <\/p>\n I\u2019ll have more to say on this topic next time.<\/p>\n