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Plan Ahead to Control Taxes on Your Retirement Accounts
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We’re fortunate to live in a country that offers us several tax-advantaged retirement plans. But tax-advantaged does not mean tax-free for most of these accounts – you may want to explore strategies for making withdrawals without triggering big tax hits.
Consider your Registered Retirement Savings Plan (RRSP). Your earnings grow tax deferred, but withdrawals are taxed as regular income. You might want to take money from your non-registered accounts first, and leave your RRSP to continue its tax-deferred growth for as long as possible.
However, once you reach 71 years old, you must convert your RRSP to an income option, most likely a Registered Retirement Income Fund (RRIF). Then, the next year, you’ll have to start making minimum withdrawals, based on age, from your RRIF, which could push you into a higher tax bracket.
If you don’t need the income, you can move the withdrawn funds to a Tax-Free Savings Account (TFSA), assuming you still have contribution room.
Another possible way to lower the taxes on your RRIF withdrawals is to consider your spouse’s age. If your spouse is younger, you can use their age to calculate your minimum withdrawal amount. The lower the age, the lower the minimum amount and the less income tax you’ll need to pay on your withdrawals.
Consult with your tax advisor about ways to control taxes on your retirement accounts. By planning ahead, you can make your retirement years less expensive.