Bracketology: Retirement Savings and Tax Brackets

Last Updated:
January 8, 2020
Ken Browness
Time to Read:

Yes – I know the title is not a word! Having said that, being aware of where you stand in regards to income tax brackets can help you maximize the after-tax benefits from your retirement savings – both on a yearly and lifetime basis.

The basic principle is this: if you can draw upon your taxable retirement savings in a year of lower income – where you know your income may rise in a future year – your overall tax bill will be lower.

Suppose you retired at age 60 and you do not have a defined benefit pension plan. You could start receiving Canada Pension Plan (CPP) income now, but you decide to defer payment to age 65 in order to receive a higher amount at that time. In the interim, you draw money from your Retirement Savings Plan (RSP), even though you would not be forced to do so until 71.

As an Ontario resident, you keep your total income - including the RSP withdrawal – to $43,906 or less, you are within the first combined Federal/Ontario tax bracket, where income is taxed at 20.05%.  

Furthermore, starting at age 65, the first $2,000 withdrawn from a Registered Retirement Income Fund (RIF) qualifies for the Pension Income Tax Credit. For those people without any other source of eligible pension income, it may be worth converting enough money from your RSP into a RIF starting from age 65, once again keeping tax brackets in mind.

Finally, for individuals without a spouse as beneficiary on their RSP or RIF, the balance as of the date of death must be included as income on the final tax return for the year of death.

For those without a defined benefit pension plan – they could easily have accumulated $250,000 or more in savings through modest contributions through a working lifetime. If, when they passed away, their remaining balance was $100,000 or more, then some of that money may be taxed within brackets ranging from 30% to over 50%.

If, however, they accelerated the withdrawals from their RSP/RIF money in such a way that the additional withdrawals would still be taxed within their existing tax bracket, then they would be potentially lowering the tax paid over a lifetime. This could be particularly effective where the after-tax amount withdrawn was placed into a Tax Free Savings Account (TFSA).  

The bottom line: be aware of your bracket so you can make your retirement the best it can be.