Welcome to our four-part series on navigating the complexities of retirement income and finances in Canada.

This series aims to provide insights and strategies to help you manage your retirement income in a tax-efficient manner. We will explore various topics, including the treatment of dividends, capital, capital gains and registered savings accounts such as RRSPs, RRIFs and TFSAs. Additionally, we will delve into income-splitting strategies and considerations for taking OAS/CPP benefits.

This series does not address minimizing the final tax on your estate; nor does it speak to maximizing the wealth transfer to your beneficiaries. However, these are both important discussions and points to consider in your overall financial planning efforts. Furthermore, these two subjects are connected to how effective you are at creating a tax-efficient retirement income. In time, CSS will write articles on these other subjects – stay tuned.

The Optimizing retirement income series will cover:

• Part 1: Five essential strategies for tax-efficient retirement income planning, supplemented with “Understanding your sources of retirement income”

• Part 2: Introduction to tax efficiency and retirement income planning

• Part 3: Essential considerations for developing a tax-efficient decumulation strategy

• Part 4: Understanding CPP and OAS

Part 1: Five essential strategies for a tax-efficient retirement income plan

Retirement income planning is a critical aspect of financial security, and for members of the CSS Pension Plan, understanding how to manage retirement income efficiently can make a significant difference. Here are five essential strategies for a tax-efficient retirement income plan:

1. Understand your sources of retirement income

The CSS Pension Plan offers various in-plan retirement options, including a traditional life-time monthly pension and Variable Benefit (VB) payments. In addition, members can transfer some or all their pension funds to a credit union or financial institution, to purchase a life annuity, or invest in registered income products (e.g., a pRRIF).

Furthermore, you will have government and personal sources of income.

It's important to understand the implications of each option on your taxable income and plan accordingly.

We cover this specific topic later in this article.

2. Utilize tax-advantaged accounts

Maximizing contributions to your CSS Pension Plan account (as additional voluntary contributions - AVCs), and to tax-free savings accounts (TFSAs) and registered retirement savings plans (RRSPs) may provide tax benefits both before and during retirement. Withdrawals from TFSAs are not taxable, and AVCs to CSS Pension Plan / RRSPs can defer tax until retirement when you may be in a lower tax bracket.

We will cover this topic in Parts 2 and 3 of this series.

3. Income splitting / Spousal RRSPs

Pension income splitting allows couples to divide pension income between them, potentially reducing the overall tax burden by keeping both individuals in a lower tax bracket.

We will cover this topic in Parts 2 and 3 of this series.

4. Strategic income (aka “withdrawal” or “decumulation”) planning

The order in which you withdraw funds from your various accounts can impact your tax efficiency. In some cases, it may make sense to begin withdrawing from registered accounts first, as this can reduce the size of your taxable estate and manage the tax impact on registered withdrawals later in retirement. You need to be strategic, however, and sometimes it makes more sense to top-up your income needs with your non-registered assets.

We will cover this topic in Parts 2 and 3 of this series.

5. Government benefits

Be aware of how your income level affects government benefits like Old Age Security (OAS). High-income retirees may face an OAS clawback, so plan withdrawals to minimize this risk and preserve these benefits. Understand the impact of timing your CPP/OAS incomes.

We cover this topic in Part 4 of this series.

In conclusion

By employing these strategies, CSS Pension Plan members can navigate the complexities of retirement income planning and enjoy a more financially secure retirement.

Please connect with a CSS Retirement and Pension Advisor to better understand your CSS Pension Plan income options, and your government sources of income. You may also want to discuss your personal tax situation and goals with your trusted financial advisors and tax professionals.

Understanding your sources of retirement income

Your retirement income comes from several sources:

• Government sources – these include the Old Age Security (OAS) and the Canada Pension Plan (CPP) (or, for those that live in Quebec, the Quebec Pension Plan).
  
  

• Personal sources – these include your personal savings into registered retirement accounts (RRSPs/RRIFs), tax-free savings accounts (TFSAs), and non-registered accounts. Outside of investments, you may also be working in retirement, have rental income, and other sources of income.
  
  

• Employer sources – these include your CSS Pension Plan, and other pension plans that you have participated in.

Each source of income is taxable differently. It is important to understand how your income is taxed and plan accordingly.

Government sources: CPP / OAS

The maximum monthly OAS benefit is $713/month and the maximum monthly CPP benefit is $1,364/month, these maximums are adjusted over time for inflation. Key highlights for each of these income sources – both:

• are taxable based on your marginal tax rate,
  
  
• increase with cost-of-living adjustments; and
  
  
• are payable for your lifetime.

If you earned more than $86,912 from all sources in 2023 ,  you will be subject to what is often called OAS claw back (OAS pension recovery tax).  

Your OAS will start at age 65, or you can defer it starting until age 70. Your CPP can start between ages 60 and 70, with the normal age being age 65. We will discuss the timing of CPP / OAS, along with other considerations, in our Part 4 article.

• Related article: When is the best time to start CPP payments?
• Related video: Federal sources
• Interested in calculating your OAS benefits? Try this estimator: Old Age Security Benefits Estimator.
• To get an estimate of your CPP benefits – you would sign in to your My Service Canada Account.

Personal sources: RRSPs/RRIFs, TFSAs

In addition to saving money in your CSS Pension Plan, you may be saving money in your RRSPs. This reading resource provides some great insights into RRSPs: Registered Retirement Savings Plan (RRSP). Contributions are tax-deductible, meaning that your taxable income is reduced dollar-for-dollar for your RRSP contributions. Here’s an example:

Your taxable income is $60,000, and you put $6,000 into an RRSP.

That drops your taxable income to $54,000 (keep in mind, you might have other deductions as well).

That is $6,000 that you do not pay taxes on.

Provided you have contribution room, you can contribute to an RRSP until the end of the year you turn age 71.

RRSPs are tax-deferred investment vehicles, meaning that the investment earnings inside your RRSP grow until you withdraw money (typically through a RRIF). With careful planning, it may be possible to withdraw that money in a lower tax bracket than you were in when you made the contributions.

RRSP / RRIF withdrawals are considered taxable income.

TFSAs are not necessarily a retirement income product, however they certainly can be part of your overall strategy. You do not get a tax-deduction for the money you contribute to your TFSA, however the money does grow tax free. Provided you have contribution room, there is no age limit on when you can make TFSA contributions or when you must begin withdrawals.

TFSA withdrawals are not considered taxable income.

Non-registered investment accounts fall within the personal sources of retirement income as well. You do not get a tax deduction for making contributions to your non-registered accounts. Investment earnings are taxable in the year that you earn them, and different types of income (interest, dividends and capital gains) are each treated differently when it comes to taxes.

Withdrawals from non-registered accounts are not considered taxable income but can still have tax implications.

Special note about “annuities” - You can use your registered or non-registered monies to purchase an annuity. Income from your annuity that was purchased with registered money is taxable. Income from your annuity that was purchased with non-registered money is only partly taxable (just the interest part of the annuity is taxable).

• Related video: Personal sources

CSS Pension Plan and other employer pensions

Your income from CSS Pension Plan can be paid to you in the form of a flexible income (e.g., Variable Benefit (VB) payments) and/or a lifetime income (e.g., monthly pension).

Your contributions to your pension are tax-deductible. Your investment earnings grow inside your pension plan on a tax-deferred basis.

When you draw an income from your CSS Pension Plan, that income is taxable income.

You may have other employer pensions. Those pensions may be a defined contribution pension plan or a defined benefit pension plan. In either case, income that you generate from such plans will be considered taxable income.

• Related video: Monthly pension (retirement income option)
• Related video: Variable Benefit payments (retirement income option)

Stay tuned for the next articles in this series, where we will dive deeper, providing you with the knowledge and tools. Remember, the key to a successful retirement is not just saving, but also strategically managing and withdrawing those savings to support your golden years in a tax-efficient manner.