Year-End Tax Strategies for Retirees: Wrapping Up 2024 Wisely

As the last little ghosts and goblins leave your front door with their candy, it’s officially the home stretch of the year. Now’s the perfect time to revisit your tax planning and ensure nothing is left until the last minute. Today, we’re diving into some valuable year-end strategies for retirees that can help save on taxes and maximize retirement income.

1. Split CPP or QPP Benefits

   If you’re receiving Canada Pension Plan (CPP) or Quebec Pension Plan (QPP) benefits, you might consider splitting those benefits with your spouse or common-law partner. This strategy can help reduce the overall tax burden as a couple. By applying through Service Canada, you can arrange for half of your pension benefits to be reported on your spouse’s tax return, and vice versa. This reciprocal arrangement may be especially helpful if one spouse is entitled to significantly more benefits than the other, offering potential tax savings for the couple.

   
   

2. Convert Your RRSP to a RRIF

   For those who turned 71 this year, it’s essential to transition your Registered Retirement Savings Plan (RRSP) to a Registered Retirement Income Fund (RRIF) before year-end. This timing is crucial for several reasons:

   • Any final RRSP contributions should be made before December 31, as the usual 60-day grace period into the new year doesn’t apply when you’re winding up your plan.

   • To minimize mandatory withdrawal amounts, base your RRIF withdrawals on the age of the younger spouse.

   • If you have earned income this year, consider making a 2025 RRSP contribution now before closing out your plan. You may incur a small penalty for overcontribution, but you can claim a deduction in 2025 if your 2024 income creates contribution room on January 1, 2025.

   
   

3. Take Advantage of the Pension Credit

   Everyone aged 65 or older can claim a pension credit on up to $2,000 of eligible pension income. To optimize this, consider converting enough of your RRSP to a RRIF to enable $2,000 in annual RRIF withdrawals. Thanks to the pension credit, this income may be received with little or no tax. Additionally, you can transfer up to half of your eligible pension income to your spouse’s tax return, which could allow both of you to benefit from the pension credit with minimal tax implications.

   
   

4. Reduce Your Income to Maximize Old Age Security Benefits

   If you’re collecting Old Age Security (OAS) benefits, you’ll know that benefits may be clawed back once your net income exceeds $90,997 in 2024. Reducing your net income may help preserve these benefits. Here are a few options:

   • Prioritize Capital Gains Over Interest Income: Since capital gains are taxed at a lower rate, they can reduce overall taxable income, though it’s important to consider the investment risks involved.

   • Utilize Non-Taxable Cash Sources: If you own a corporation with outstanding loans to you, consider a repayment from this shareholder loan, as it won’t add to your taxable income.

   • Claim Deductible Expenses: Contributions to spousal RRSPs, interest expenses, or self-employment and rental losses can help lower your net income. Be mindful, however, that dividend income from Canadian investments can worsen your OAS clawback since $1 of eligible dividends appears as $1.38 on your tax return.

   
   

5. Consider Contributing to a Spousal RRSP

   If your spouse is younger and still qualifies for an RRSP, consider contributing to a spousal RRSP to help lower your 2024 taxes. You need to have your own RRSP contribution room available, but this contribution can provide a valuable deduction for 2024, even if you no longer have an active RRSP yourself.

   
   

6. Explore In-Kind Transfers from Your RRIF

   If you have a RRIF and are required to make minimum withdrawals, consider transferring investments from your RRIF that you expect to appreciate in value. This approach fulfills your withdrawal requirement while allowing the investment to grow outside the RRIF. Future gains on these investments will be taxed at capital gains rates, which can be more favorable. Additionally, the first $250,000 of capital gains earned personally each year is only half-taxable, providing further savings.

   
   

   Start Planning Early

   As the year comes to a close, take some time to assess these strategies and see if any could help optimize your retirement income. Year-end tax planning can reduce your tax burden, preserve more of your retirement benefits, and set you up for a financially healthy new year.

   If you’d like to explore these strategies further or discuss other tax-saving opportunities, we’re here to help. Reach out to us at Founders Wealth, and let’s make the most of 2024’s remaining days!