What is a Retirement Tax Optimization plan?

Posted by Larry M on November 24th, 2020

Saving and planning for retirement is only half the job. Deciding how, when, in what order, and at what rate to draw from the various potential income sources available to you is a far more complicated process. This is where a Retirement Tax Optimization plan (RTO plan) comes into play.

The most common strategy for accessing RRSPs, RRIFs, or LIFs is to “defer” until you can defer no longer. The year that you turn 71 you will be required to draw a minimum annual amount from all of your registered retirement savings — but is the government-mandated withdrawal strategy the most tax-efficient method? For most people, the answer is “absolutely not” — unless, however, your goal is to pay as much income tax as possible.

There are 120 different potential “start dates” for CPP, each one providing a different income level to you. There are also 60 potential “start dates” for OAS. In conjunction with a pension (with or without a bridge), your personal retirement savings, and any other assets you plan to use in retirement, which “start date” is the most tax efficient for you? Would it make sense to start drawing CPP or OAS while you’re still working?

A customized and effective RTO plan can answer these questions and potentially find tens of thousands of dollars (or even hundreds of thousands) that you would otherwise be paying to the government. These unnecessary payments are often in the form of income tax, reduced benefits, or clawbacks. An RTO plan will integrate all of your retirement income sources and determine which to draw from, when, at what rate, and where to shelter it for later access. You remain in full control of all your assets — you just simply give less of it to the government.

Your financial advisor should be able to run scenarios for all possible strategies and give you reports showing which strategy is the most efficient for your specific situation. This is a very sophisticated process, but the results can be potentially life altering for you and your family.

If you have retired, or are within 5 years of retirement, and would like to see how much an RTO plan can improve your retirement, start here.