How to split RRIF income with a spouse to get the $2,000 tax credit

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For most individuals, it is smart to transform sufficient of your RRSP to a RRIF and declare the pension tax credit score

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By Julie Cazzin with Allan Norman

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Q: I simply turned 65 years of age and nonetheless work full time. To reap the benefits of the $2,000 pension tax credit, I have to convert at the least a few of my registered retirement savings plan (RRSP) right into a registered retirement income fund (RRIF) in order that I can withdraw $2,000 every December as qualifying pension earnings. My query is, if I set this up at this time, can I withdraw the $2,000 and declare it as qualifying pension earnings for 2023? Additionally, my spouse Dorothy is 63 years previous. Can RRIF pension earnings be cut up together with her? Or does she must be 65 years of age? What’s one of the simplest ways for me to reap the benefits of this tax credit score for my spouse and I at this level? — James S.

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FP Solutions: James, that’s a great query. I discover there may be some confusion across the pension tax credit score. Lots of people assume they need to robotically convert all or a few of their RRSP to a RRIF and draw $2,000 per 12 months to assert the pension tax credit score as soon as they enter the 12 months they flip 65. Some folks even assume claiming the pension tax credit score is a option to get $2,000 out of their RRSP/RRIF tax free. Neither of those ideas are essentially right. Let me shortly deal with your questions after which I’ll dive just a little deeper into the pension tax credit score.

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You’re proper, within the 12 months you flip 65, you’ll be able to declare the federal $2,000 pension tax credit score even in case you are nonetheless working. There’s a listing of what qualifies as pension earnings, and RRIF earnings qualifies, which is the explanation you wish to convert a few of your RRSP to a RRIF. I presume you aren’t changing all of your RRSP holdings to a RRIF, as a result of the minimal RRIF withdrawals will drive you to attract greater than $2,000 per 12 months out of your RRIF, which is greater than what you’ll be able to declare for the pension tax credit score.

Your RRIF earnings might be cut up together with your spouse within the 12 months you flip 65 even when Dorothy is just not but 65. The pension tax credit score is non-refundable, that means you’ll be able to’t cut back your earnings under zero and anticipate to get a tax refund — it’s non-refundable. You possibly can, nonetheless, switch all, or the unused portion, of the pension tax credit score to your spouse.

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Sadly for you, James, your spouse have to be 65 on this case. Apparently, there are qualifying pensions that do mean you can switch the pension tax credit score to a partner beneath the age of 65, however RRIF earnings is just not one in all them.

Now, the query is must you convert a few of your RRSP to a RRIF and declare the pension tax credit score? In Ontario, the tax financial savings is $378 regardless of your tax bracket, excessive or low, which you’ll see within the accompanying desk, together with the tax owing.

$2,000 pension tax credit tax savings and owing in Ontario

As you’ll be able to see, there may be little or no tax owing on the decrease earnings stage when the mixed federal and Ontario tax fee — 15 per cent and 5.05 per cent, respectively — is 20.05 per cent. The federal pension tax credit score is calculated as 15 per cent of $2,000, or $300, which offsets the $300 of federal tax owing. In Ontario, the pension tax credit score solely applies to pension earnings as much as $1,541, leading to a credit score of $78 (or 5.05 per cent of $1,541). You continue to must pay provincial tax on the remaining $459 at 5.05 per cent, which involves $23.

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The identical applies to folks incomes greater than $235,675 per 12 months, the best tax bracket in Ontario, however the mixed federal and provincial tax fee is 53.53 per cent, so high-income earners must pay some federal and provincial tax on the $2,000 RRIF withdrawal.

James, I’m unsure what your present earnings is or how lengthy you intend to maintain working. No query, there are tax financial savings for you right here. If I used to be to complicate this and search for causes so that you can not convert a portion of your RRSP to a RRIF, listed here are three of them:

Will you be in a decrease tax bracket and pay much less tax on the $2,000 RRIF withdrawal whenever you cease working?

Are you higher to go away the $2,000 in your RRSP so the investments compound tax sheltered till you flip 72?

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Will there be an extra account charge should you open a RRIF account?

Thankfully, it doesn’t must be that difficult relating to the pension tax credit score. There’s a small tax financial savings, and you aren’t going to make a significant mistake regardless of your resolution, so go together with your intestine. For most individuals older than 65 with out pension earnings, it is smart to transform sufficient of your RRSP to a RRIF and declare the pension tax credit score.

Allan Norman offers fee-only licensed monetary planning companies by means of Atlantis Monetary Inc. and offers funding advisory companies by means of Aligned Capital Companions Inc., which is regulated by the Investment Industry Regulatory Organization of Canada. Allan might be reached at alnorman@atlantisfinancial.ca

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