Many could be in jeopardy of having their government benefits and credits clawed back unless they take a long-term approach early in their retirement years to structure their retirement income strategically and minimize the taxes they pay, the report contends, according to a press release.
The report, Mind Your Taxes in Retirement, shows that only a small percentage of Canadian Boomers know how best to maximize their tax savings, leaving them vulnerable to having benefits and credits such as Old Age Security (OAS) and the Age Credit clawed back. For example:
- Seventy-nine percent of Canadians ages 45+ either answered incorrectly or did not know how dividend income and capital gains are treated from a tax perspective;
- More than one-third (34%) either answered incorrectly or did not know how interest income is treated from a tax perspective; and
- Forty-one percent did not recognize the correct tax effect of making a withdrawal from a Registered Retirement Income Fund (RRIF).
“It’s critical that retirees be tax smart and adopt a long-term approach that will allow them to pull their income from the most advantageous sources,” said Tina Di Vito, Head of the BMO Retirement Institute. “Doing so will also ensure that those with a higher retirement income don’t exceed the thresholds that allow them to continue to receive government benefits and credits, which could have a significant impact on their total annual income.”
The research also found that 47% of the survey respondents who are retired rely on OAS as one of their principal sources of income. OAS, which is provided by the government to Canadians 65 and older, is an income-tested benefit that could be taken away if a recipient exceeds a certain income level. Awareness of one’s income level and tax bracket is therefore crucial to planning to preserve one’s eligibility to the benefit. Yet, only 21% of the retirees knew the exact tax bracket they would be in once retired.To view a copy of the full report, visit http://www.bmo.com/retirementinstitute.