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BMO Bank of Montreal

February 18, 2012 08:00 ET

BMO Retirement Tips of the Day: Consider Splitting Income to Pay Less Tax & Take Steps to Keep More of Your OAS Income

TORONTO, ONTARIO--(Marketwire - Feb. 18, 2012) - As the February 29th deadline approaches to make a contribution to a Registered Retirement Savings Plan (RRSP) and as part of its ongoing commitment to improving financial literacy, BMO Financial Group will be providing daily retirement tips during the month of February from BMO Retirement Institute Head Tina Di Vito's new book 52 Ways To Wreck Your Retirement…And How To Rescue It.

Tip Number 35:

Consider splitting income to pay less in taxes, now and during retirement

In the Canadian tax system, higher-income Canadians pay anywhere from 38 to 50 per cent in income tax, depending on the province or territory in which they live. Because Canadians file separate income tax returns from their spouse or common-law partner, there may be situations where one person is paying at the highest tax rate, while the other is paying no tax at all. If couples split their income as reported on their tax returns, they could save a great deal of tax. For example:

Before income tax splitting
You Your Partner Combined
Income $65,000 $5,000 $70,000
Tax estimate $13,000 $0 $13,000
Net after tax $52,000 $5,000 $57,000
After income tax splitting
You Your Partner Combined
Income $35,000 $35,000 $70,000
Tax estimate $5,000 $5,000 $10,000
Net after tax $30,000 $30,000 $60,000

The simplified example above results in a savings of $3,000. Income splitting is not always automatic. Here are tips for couples to keep more of their income and pay less in income taxes:

Pre-retirement years:

  • Higher income earning spouses should pay all of the household expenses so the lower income earner can save most of their income in their own name.
  • Build assets in the lower income earning spouse's name by making a contribution to his/her spousal RRSP, Tax Free Savings Account or setting up a spousal loan.

During Retirement:

  • As soon as you are eligible to split pension income, make an election on your tax return and claim pension income split up to 50 per cent of eligible pension income.
  • As soon as you are eligible to share CPP/QPP payments, apply to do so.

Tip Number 36:

Take steps to keep as much of your Old Age Security income as possible

Old Age Security (OAS) is paid to Canadians aged 65 and older who have lived in Canada for at least 10 years after their 18th birthday. Those that qualify for OAS get the maximum entitlement after 40 years of Canadian residency, which over a 25-year period can amount to $160,000. However, besides being subjected to income tax, OAS is also income-tested; this means that some or all of that amount may be paid in taxes if your income in retirement exceeds the annual threshold amount, which is approximately $69,562 for 2012.

For those in retirement, consider these strategies to keep as much of your OAS income possible:

  • Make an estimate of your retirement income to determine how close you might be to the OAS threshold. Ask your financial planner to help you with this.
  • Begin to rebalance your portfolio up to five years before you start collecting OAS so that there is no spike in income resulting from capital gains.
  • Seek out advice and proper planning so you can reduce the impact that a withdrawal from your savings will have on your income and the OAS clawback in retirement.

For more information on retirement: www.bmo.com/retirement.

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