The goal of retirement income planning is to make sure your clients have enough cash for their golden years, but that involves more than just finding the right annuity. Tax planning is one of the best, and easiest, ways to keep more money in your clients’ pocket.

While there are several tools to mitigate a tax hit, income splitting is one of the most beneficial strategies. "It’s an enormous tax savings," says Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth Management. "You can transfer up to 50% of an individual’s pension to move the person from a higher tax bracket to a lower one."

Pension splitting is ideal for retirees, because it lets them preserve their old age security (OAS), which gets clawed back at a certain level of income. If they can transfer pension assets to someone under 65 who won’t see a claw back — even if the person is in the same tax bracket — "that can be substantial savings," says Golombek.

"The fact that you can allocate up to 50% right off the bat offers people the opportunity to keep more money in the family," adds Frank Di Pietro, Mackenzie Financial’s director of tax and estate planning. "You can do this with RRIFs or locked-in plans as well, but you have to be over 65 to do that."

Another tax savings measure for retirees is CPP pension sharing. Di Pietro explains that if a client has a spouse in a lower tax bracket, he can apply to have his and his partner’s pensions combined and then split evenly between the two of them.

"The difference between this and pension splitting is that you actually have to apply for it, and the spouses are sent an equal dollar amount of pension each month," says Di Pietro. "With pension income splitting, the pensioner receives a monthly payment, and then makes an allocation on the tax return."

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Besides pension splitting, major savings can also be achieved through tax sheltering. Golombek points out that just because people are retired doesn’t mean they have to stop contributing to their RRSP.

"When people take early retirement, they may still have contribution room left over from their working years, so they can make those payments and reduce income," he says, adding that many retirees also work part-time, so they might consider taking some of that income and stashing it in a RRSP.

Canadians over 71 who have a younger partner might consider contributing to a spousal RSP as well. "I often see 75-year-olds who have rental income and who have a spouse in his or her 60s," says Golombek. "In that case they can contribute to a spousal RSP."

There’s one RRSP-related tax savings option that retirees will be able to take advantage of only this year. Recently, Finance Minister Jim Flaherty announced that he would reduce the allowed minimum RRIF withdrawal by 25% for 2008. So if someone had to take $10,000 out of the account last year, the new rules allow the individual to repay that extra $2,500 into the RRIF or RSP this year and get a tax deduction.  "It’s an option to help retirees continue to benefit from tax deferral offered inside RRSPs and RRIFs," says Di Pietro.

He adds that Canadians have until April 14 to put that money back into their account. "It’s something people should take advantage of if they don’t need the income from the RRIF."

In addition to registered savings plans, the new tax-free savings account (TFSA) can be a boon to people who want to keep more money for themselves. Golombek says seniors should max out the TFSA — which means contributing $5,000 a year to the account — if they can, since they can earn income tax-free for life. "It’s a nice benefit, too, because when money is withdrawn it’s not included in income," he says. "So it’s not taxable and doesn’t impact net income for clawback purposes."

Partners can also gift money to a spouse’s TFSA, "so really you’re looking at $10,000 of tax sheltering a year," says Golombek.

While TFSAs and RRSPs are significant money savers, it’s also important for retirees to have the most tax-efficient investments. Golombek says advisors have to look at interest income versus capital gains versus dividends. Income interest is the worst for tax, while capital gains and dividends either come in second or third depending on the province, he says.

"If you want to generalize, though, dividends and capital gains are taxed at half the rate of interest income," he says. "So look at investments that generate the former."

"Don’t forget that investments make sense in certain types of plans," adds Di Pietro. "Interest-bearing investments, GICs, term deposits, money market funds — those are best held in tax-sheltered vehicles like a RRSP or TFSA. Investments that produce more tax-efficient income, such as dividends or capital gains, are best held outside those sheltered plans in simple, non-registered accounts. That way taxable investment income is kept to a minimum."

There are plenty of other ways to minimize taxes, including donating securities to charity. Golombek says clients will be better off if they don’t donate, but if they are charitably inclined, they can get a tax credit of 40% for any donation over $200. And while it might be difficult to find securities that have gone up in value during this economic downturn, if a fund or stock price has risen and it’s given to charity, gains don’t have to be paid and the investor will receive a hefty tax credit.

There have also been improvements made in the age credit, which is a non-refundable tax credit for people over 65. It was increased to $1000 in the last budget, while other measures — like increasing the basic personal amount — will give retirees a little more cash to use. "Even if a client does nothing, there are tax savings to be had," says Di Pietro.

Originally published on Advisor.ca