Disclaimer
I’m not a tax professional, accountant, or financial advisor. I am not even retired. This blog post is for informational and educational purposes only. It’s not intended to be a substitute for personalized and professional tax advice.
Chart
I created a spreadsheet that combines the provincial and federal tax brackets for British Columbia with the clawback on Old Age Security Benefits. This was done to determine the effective marginal tax rate for high-income seniors in British Columbia.
Note that this chart assumes that Old Age Security has been delayed until age 70 and the recipient is eligible for the maximum amount.
Observation
An interesting observation from the chart is the decline in the effective marginal tax rate at $172,624, which is the income level where Old Age Security benefits are fully clawed back. This shows that the income tax system for seniors is not perfectly progressive. One implication is that high-income seniors may end up paying less tax on average if they are able to strategically stagger their income over multiple years.
Hypothetical Scenario
Let’s consider two hypothetical retirees, Bob and Alice.
Both of them:
- Are in their early 70s.
- Want travel while they are still young; 70 is the new 60!
- Spend $110,000 per year.
- Receive $24,000 per year from the Canadian Pension Plan.
- Delayed Old Age Security until they were 70 years old.
- Have $1,000,000 in their Registered Retirement Income Fund (RRIF).
To cover her annual spending, Alice withdraws $130,800 from her RRIF each year. She pays $45,693 in income tax, and only receives $3,144 from Old Age Security because $8,732 was clawed back.
Bob, on the other hand, staggers his withdrawals:
In odd years, he withdraws $196,253 from his RRIF. He pays $75,087 in income tax, and receives no Old Age Security, because it is entirely clawed back.
In even years, he withdraws $57,578 from his RRIF. He pays $18,618 in income tax, and receives the full $11,876 from Old Age Security, as none of it is clawed back.
Note that both Alice and Bob are able to spend $110,000 per year on average. However, Alice has to withdraw $130,800 from her RRIF every year, whereas Bob only has to withdraw an average of $126,916 per year.
Please note that this hypothetical was carefully chosen to illustrate the potential tax savings and the outcome is not generalizable to all levels of taxable income; tax rates for seniors are mostly progressive, after all.
Conclusion
The hypothetical case of Bob and Alice uses RRIF withdrawals to demonstrate how staggering taxable income in retirement could lower total tax paid, but there’s nothing special about RRIFs for this purpose; any type of taxable income that you have some control over is potentially in play.
I believe that this also means the conventional wisdom around pension income splitting (i.e., that it’s beneficial to shift income from the higher-income spouse to the lower-income spouse) may not be universally applicable.