Delaying CPP to age 70? Tips to withdraw other retirement income tax efficiently until then

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Most Canadians are advised to delay their Canada Pension Plan (CPP) and Old Age Security (OAS) benefits until age 70, if possible, but are left with the question of how to withdraw other taxes on retirement income effective until then.

For more straightforward portfolios, the advice is always to start taking money from non-registered accounts and leave the funds in registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs) ) or tax-free savings accounts (TFSAs) because of their tax advantages.

However, the strategy can be more nuanced if the investor has other sources of taxable income or a large expense at one time.

“Every client is going to be very different and have their own unique set of circumstances and tax implications,” says Kathryn Del Greco, senior investment advisor at Del Greco Wealth Management at TD Wealth Private Investment Advice in Toronto.

Why wait to get CPP and OAS?

If someone chooses to wait, for each year CPP is deferred after age 65, their payments will increase by 8.4 percent. That means starting at age 70 will increase the amount by 42 percent compared to starting at age 65. If OAS collection is deferred to age 70 from age 65, the benefit amount will increase by 36 percent.

The average Canadian who takes CPP or the Quebec Pension Plan at age 60 — whichever is the earliest possible — instead of waiting until age 70 could lose more than $100,000 in “secure, worry-free income in retirement that lasts a lifetime and keeps up with inflation. ,” according to a 2020 report by Toronto Metropolitan University’s National Institute on Aging (NIA) and the FP Canada Research Foundation.

“If you’re in a financial position where you can delay payments, it’s very important,” said Ms. Del Greco.

Waited too long shifts risk from personal savings to inflation-protected government benefits received for life.

Despite the obvious benefits, the NIA report says that less than 1 percent of Canadians delay their CPP. Many choose to get the funds as soon as possible because they need the money or are worried that they will not live long enough to take advantage of the government benefits.

However, “if you’re in good health, and cash flow isn’t an immediate issue … it’s better to wait until age 70,” Ms. Del Greco.

Income strategies for those who wait

For those who have delayed CPP and OAS and need retirement income in the meantime, Ms. Del Greco as a general rule is to withdraw funds first from non-registered accounts because they are less tax efficient than registered accounts.

He says that a person can withdraw money from a TFSA if they need more money in a particular year because the withdrawal is tax-free and the money can be put back into the account the following year. without losing any contribution room. That’s not like an RRSP withdrawal, where the money withdrawn is taxed and the contribution room is lost.

“The TFSA is an excellent tool for reasons like this,” said Ms. Del Greco.

An RRSP can be a better source of income for retirees who don’t have unregistered retirement income they can use first, he said, or if they have a large RRSP they want to use up quickly. For example, Mr. Del Greco says that RRSPs can only be transferred to a spouse or child upon death, so a person may want to use more of their RRSP earlier in retirement.

“There is no one answer for everyone,” said Ms. Del Greco.

Jennifer Tozser, senior wealth advisor and portfolio manager at Tozser Wealth Management at National Bank Financial Wealth Management in Calgary, says she uses a combination of withdrawal strategies for both registered and non-registered accounts. for retirees.

That may mean paying higher taxes in some years, but it also helps investors avoid taking more income than they want later in life, which could result in a clawback of their benefits. in OAS.

He said the strategy is more complicated when business owners withdraw income from their corporations in retirement.

“The timing of when you transfer the money from your corporation to your personal account and claim the tax should be done by a tax professional,” said Ms. Tozser.

For example, he said that some business owners may consider taking a large portion of the income from their corporation in one year, paying taxes, and losing OAS for that year. The business owner can then invest the funds in personal tax-efficient accounts such as TSFA or RRSP, if applicable.

Dami Gittens, senior wealth planning associate at Nicola Wealth Management Ltd. in Vancouver, says investors may want to withdraw more from RRSPs in their 60s depending on how much is saved to lower their total income when they start receiving CPP and OAS.

Investors over the age of 65 can also take advantage of the pension income tax credit, a non-refundable federal tax credit of up to $2,000 of eligible pension income. While not a huge amount – the federal tax credit rate is 15 percent with a maximum federal tax savings of $300 – it helps reduce taxes.

“Even if you don’t need the fund between the ages of 65 and 70, I recommend people take advantage of it,” Ms. Gittens.

He added that it’s important for investors to start thinking about retirement withdrawal strategies before they reach traditional retirement age.

“I would say age 55 is a good time to start looking at it more closely,” Ms. Gittens. “During that time, you start to get a clearer picture of what your retirement income will look like. This gives you a little more wiggle room to plan accordingly. “

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