When we retired, I thought we had an air tight income plan. After all, I had gave it quite a bit of thought (over-thought), and figured we had outsmarted the taxman. I had set up my LIFs and our RIFs to pay the minimum elections (payments) by my wife’s younger age, and therefore the tax was not taken off the whole year from our registered account payments. At tax time in April the following year, we found out we owed quite a bit in back-tax, and the withholding tax from our large lump sum withdrawals in Dec helped, but wasn’t nearly enough to service the larger tax bill from the Lifs and RIFs income that was not paying withholding tax. On top of this, we had some other non-registered investments with dividend income to pay deferred tax on. If you owe more than $3k in tax for two consecutive years, the CRA (Canada Revenue Agency) sets you up on mandatory quarterly tax instalments based on your prior years assessment and what you owed. I thought I was being smart by not paying tax until tax time, thinking it was better to withhold our tax in my pocket through the year, than pay the CRA tax upfront for the whole year, while in reality it didn’t really matter because they eventually get you with the quarterly tax instalments program anyways.
That’s what happened to me, the large quarterly tax instalments, and after a few years of this scenario early in our retirement, I got kind of tired of living retirement paycheque to retirement paycheque, so-to-speak, due to the minimum registered account withdrawals and high quarterly tax instalments, and therefore decided to take more upfront and prepay tax. So, in 2023 I switched my LIFs (pension) payments to the maximums for my age, and set up with our investment platform to pay withholding tax. This didn’t change our monthly pay or drawdown plans that much, and prepaid some of my tax in 2023. Being the higher income generator between the wife and I, I was still on the hook for the larger quarterly instalments.
But because the CRA doesn’t know if you’ve changed anything with your income and taxation plans, in 2023 I continued to pay the large, calculated quarterly tax instalments based on our 2022 assessment. Put simply, in 2023 I overpaid on taxes as a result, and now expect a substantial return to the tune of what I had withheld in tax from my LIF accounts. In essence it was kind of a savings plan, albeit without the interest or ability to invest the cash.
But wait, the story gets better. In the latter half of 2022 it dawned on me that we had a significant amount of ineligible shares paying dividends and investments with interest as a portion of the annual returns in our joint non-registered investment account. The income in non-registered accounts is not sheltered and taxed annually. Non-eligible dividends do not benefit from the dividend tax credit, and interest income is taxed at the highest rate for investment income, therefore we were not getting the fullest tax advantage from our non-registered portfolio structure. In Dec 2022 we got rid of the ineligible shares, which included a substantial investment in a single REIT, along with some other ineligible shares, when the market was on a bit of a recovery, took the capital gains, and in Jan 2023 used the proceeds to buy all eligible bluechip Canadian bank shares, which were depressed at the time. This move gave us value in the form of getting both a decent amount of shares and higher dividend yields due to depressed share prices. Furthermore, all the shares are eligible, and therefore qualify for the dividend tax credit, providing maximum tax advantage. This tax advantage significantly changed what we make versus what we pay in tax. Capital gains of eligible shares are also taxed equally favorably, so we saw benefit there as well in 2022.
So, long story short, in 2023 we prepaid some tax by increasing my LIFs to the maximum elections, and reduced our tax by moving into all eligible shares in our joint nonregistered investment account. We continued to pay the quarterly tax instalments as calculated for 2022 despite the changes we made in 2023. All this equates to getting a large tax return back this year when our taxes get done. Really, it’s just the government giving some of my money back, but they wouldn’t have given it back if we hadn’t made the changes. The move to all eligible shares in our taxed, joint investment account was very beneficial from a tax perspective as well.
In Jan 2024 we made more big changes. Now that we have a much clearer picture of our dividends-income-expense-tax requirements, we have increased the monthly withdrawals from our RIFs to exceed the maximums (you can do this for your RIFs but not your LIFs/pensions), to more closely match our historical annual withdrawal amounts, and are now paying withholding tax on all payments from all registered accounts. This has increased our monthly net retirement paycheque significantly, and helped us get much closer what we would withdraw for the whole year, as well as prepay taxes through the year on all our registered income streams. On a monthly basis we are now saving versus being stressed on bills, spending, and executing our retirement goals like travel, etc. We’ll still withdraw a lump sum in Dec to meet our overall income and drawdown goals, but the changes have significantly reduced the lump sum withdrawal amounts required. As a result we should be much, much closer on our annual tax obligations, and the quarterly instalments will be significantly reduced for me as the primary income generator, and likely eliminated for the wife. Overall, it should result in a more hands-off approach to our income and drawdown plan. It is also helping in terms of drawing down these accounts a bit quicker, which I felt was needed. Time again will tell.
I mentioned this before, but we also changed our registered portfolio structure. In Dec of 2023, we sold off a third of an indexed retirement income fund (VRIF), and moved the cash into a high-dividend, cover-call, fund from Hamilton. This change allowed us to make the switch to taking monthly withdrawals from our registered accounts above the age maximums, and have them covered completely (and more) by the dividends generated from these two funds. In fact, they will together generate enough divdends to not only pay the elections above the yearly maximums we’ve set for 2024, but will also cover the planned December lump sum withdrawals through savings, unless we elect to take more.
I decided some 10 years ago to be a DIY investor, and carried that DIY aspect into our retirement planning and execution. 4 years post-retirement, we have been tweaking things ever since. This year, I think we are much closer to a plan that fits our drawdown timelines and pays the tax upfront. We still haven’t drawn on CPP or OAS, and don’t intend to for a few years yet. Although now I’m starting to ponder these programs potentially being utlized to pay tax, so we can get more money out of our registered accounts quicker. But this is something I’ll consider after I see how this recent adjustment works for a couple years, and closer to my age of 65. We’ve been learning and making adjustments since we retired, and will more then likely make more changes in the next few years.
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