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BMO Bank of Montreal

February 20, 2012 08:43 ET

BMO Retirement Tips of the Day: Minimize Investment Tax & Consider the Possibility of Being Single in Retirement

TORONTO, ONTARIO--(Marketwire - Feb. 20, 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 39:

Avoid paying too much tax on investments

After selecting the right asset mix based on your risk tolerance and goals, consider the after-tax rate of return on your investments in order to make the most appropriate investment decisions and avoid paying too much tax. Although there are thousands of investment options available today, there are only three types of investment returns and each type is taxed differently:

  • Interest Income: Interest income is received on investments such as Guaranteed Investment Certificates (GICs), government or corporate bonds and certain mutual funds such as money market or bond funds. Since this is the most expensive form of investment income from a tax perspective, consider sheltering interest income in tax-efficient or tax-free investment vehicles, such as RRSPs or TFSAs.
  • Dividend Income: If you invest in Canadian companies, either directly by buying shares or indirectly by purchasing a mutual fund, you may receive a dividend. Dividend income is taxed at a lower rate than interest income.
  • Capital Gains: Capital gains accrue from investments in shares of a company or in any other asset that may go up or down in value. In Canada, only 50 per cent of a capital gain is taxable while the other 50 per cent is tax-free.

To ensure you're not paying too much on investment tax, consider the following:

  • Review your investments to understand exactly what kind of income you are earning and how it is taxed.
  • Shelter investments that pay interest income by holding them in a tax-deferred or tax-free plan.
  • Offset income taxes triggered by capital gains by selling investments that experience a capital loss.

Tip Number 40:

Be prepared to be single in retirement

If you are part of a couple right now, your retirement plans likely include both you and your partner, even though there may be two distinct retirement dates and two sets of pensions and retirement savings. However, it may come as a surprise to know that 43 per cent of Canadians aged 65 and older are single. Some have never married, but 88 per cent of those singles are widowed, separated or divorced. So it stands to reason that becoming suddenly single in retirement could be a reality for many Canadians. And while planning for this reality can be uncomfortable, here are a few aspects worth considering:

  • Do not relegate financial matters to one person in the family. Not knowing how your money is invested, how much income you are receiving, or how your expenses are impacting your total savings can cause you to be unprepared to take on this responsibility.
  • Review all of the family's sources of retirement income and determine what the survivor income will be for each spouse.
  • Consider options such as life insurance to provide for the survivor.
  • Get to know the family's financial advisor and ensure all parties understand how your retirement savings have been invested.

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

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