Help your clients pay less tax by working with them to plan how they’ll draw money from their retirement savings. When you do, it’s important to show that the accumulation and income phases complement each other and don’t exist separately.

The wealth management industry often focuses on the accumulation phase, by combining investment selection, portfolio construction, risk management and tax-efficient strategies. How clients draw on their hard-earned savings, however, can mean significant differences in account balances and, most importantly, how long their money will last.

Taxes play a big part in managing how clients draw on their retirement income. Managing their taxable income can:

  • minimize taxes,
  • maximize government pensions and benefits, and
  • manage the risk of running out of money.

Jennifer Poon is Director of Advance Planning Wealth at Sun Life Financial and provides advice about tax efficiency. “This strategy is good for your book of business. Managing taxes and withdrawal rates can help ensure your clients’ savings are adequately replenished, and book balances are maintained or even increased.”

Jennifer offers three suggestions you can present to your clients:

1. Manage RRIF age mandatory withdrawals.

“Plan for effective withdrawals and place money in registered and non-registered accounts with an income plan in mind.”

For clients with large registered retirement savings plan (RRSP) balances, mandatory age minimum withdrawals can create large income inclusions and push those clients to a higher tax bracket. Subsequent income tests could result in lost government benefits.

Consider this example:

A 71-year-old Ontario resident currently generates $71,000 of retirement income annually for his living expenses and has $1,000,000 in his RRSP.

In December of the year he is 71 years old, his RRSP will convert to a registered retirement income fund (RRIF).

At age 72, he is subject to age minimum withdrawals of 7.48% or $74,800. This will push his taxable income from $71,000 to $145,800, meaning he’ll have to pay $31,000 more in taxes (from $15,000 to $46,000, or an effective tax rate of 21.5% to 32%). Old Age Security (OAS) is completely clawed back.

Drawing too much income could lead to clients running out of money in retirement. A large RRSP balance at death can also create a large estate liability. If their RRSPs aren’t rolled over to their spouses on a tax-deferred basis, 100% of their RRSP balance would be included on their last return and taxed as ordinary income, potentially translating into a big tax bill. For example, a $1,000,000 RRSP balance at a marginal tax rate of 44% (with the highest marginal tax rates up to 50% in Nova Scotia, Ontario and Quebec) would lead to $440,000 in taxes. Review clients’ registered savings early and work with them to create a tax-efficient withdrawal plan.

2. Mind the tax sources of your retirement income.

“Consider how income will be taxed on your clients’ investments.”

How your clients’ income is taxed is important. Is it taxed as ordinary income, dividends, capital gains or return of capital? Ordinary income is taxed at the highest rate at every bracket. Dividends receive a dividend tax credit, and capital gains have a 50% inclusion rate. As well, every dollar of interest earned is taxed. This means clients will likely have a higher taxable income than if they’re receiving capital gains or return of capital; a higher taxable income amount can challenge various government income tests such as OAS or Guaranteed Income Supplement.

The following chart shows tax characteristics and rates:

Tax characteristics Tax rates Examples
Ordinary income Highest tax rate at each bracket Pension, RRSP/RRIF withdrawals, interest, rental income, foreign dividends, foreign income
Eligible dividends Gross-up and receive dividend tax credits Canadian public company dividends, dividends from corporate class funds
Capital gains 50% inclusion rate at each tax bracket Sale of properties, securities and/or redemption of mutual funds
Return of capital Not included as taxable income T-series mutual fund series, non-registered prescribed annuity payments for most annuitants over age 70

Managing your clients’ taxable income is crucial to maximizing their retirement income. Increasing their government benefits means a lower withdrawal rate on their savings and can help ensure their retirement savings will last a lifetime, with the added bonus of preserving their estate value.

3. Consider spousal RRSP vs. pension income splitting.

“There’s a place for both. A spousal RRSP is effective for RRSP withdrawals before age 65.”

With the introduction of pension income splitting, where there are plans for RRSP withdrawals before age 65, spousal RRSPs will still be effective when pension income splitting isn’t available. Some examples include early retirement, retirement due to illness, or requiring funds due to loss of employment.

Thinking about how they’ll spend their retirement savings may not be a high priority for your clients, but you can help them look ahead and plan now. For clients planning to retire in the next 5, 10, 15 or 20 years, Jennifer suggests talking with them when they contribute to their RRSP about creating an effective income plan to complement their accumulation plan.

Across our Insurance and Wealth business, our Advance Planning services deliver professional expertise and insights through our team of chartered accountants and lawyers. Jennifer and other directors of Advance Planning are part of your Sun Life Financial team, committed to supporting you and enhancing the value you bring to your clients.

If you want to learn more about our Insurance and Wealth Advance Planning initiatives and resources, please talk with your Sun Life Sales Director.

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Rocco Taglioni, Senior Vice-President, Head of Distribution, Individual Insurance and Wealth, is responsible for the overall leadership of Sun Life Financial’s distribution organizations across its Retail business in Canada. His role encompasses the leadership of the distribution company, as President Sun Life Financial Distributors Inc., as well as the Insurance and Wealth wholesaling sales organizations. Through the various leadership teams he oversees the development, direction, and execution of the Distribution strategies centered on wealth management, protection, retirement, and estate and financial planning.

Since joining Sun Life in 2004, Rocco has held various executive leadership roles, including Vice-President Business Development, Group Benefits; Head of Individual Wealth Management; Senior-Vice-President, Client Solutions; and most recently Senior Vice-President, Distribution and Marketing, Individual Insurance and Wealth. Throughout his tenure at Sun Life, Rocco has led various business strategies centered on building, transforming, and evolving organizations and teams to drive higher levels of performance and success.

Rocco has 36 years of experience in strategic leadership in the insurance and investment industries. He has served on and is a member of a number of boards. Rocco is currently President and Chair, Sun Life Financial Distributors (Canada) Inc. and is a member of the Sun Life Financial Investment Services (Canada) Inc. board. He is a member of various industry associations, including Advocis, GAMA Canada, the Canadian Pension and Benefits Institute, and the Association of Canadian Pension Management.

Rocco holds a Bachelor of Arts in Economics from York University.