How Much Should You Save for Taxes?When you withdraw savings from a Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF), the amount becomes part of your taxable income that year. So is it wise to put a certain amount aside to pay the taxes?
“Many things can affect the amount of income tax you’ll have to pay when you withdraw RRSPs or RRIFs,” says Gordon Jessup, a Chartered Accountant and Partner with Fuller Landau LLP in Toronto.
“With RRSPs, there is a withholding tax on withdrawals. But it may not be enough to offset the taxes you’ll have to pay,” he explains. “On a lump sum of $5,000 or less, the withholding tax is only 10 per cent; on withdrawals over $5,000 but not exceeding $15,000 it’s 20 per cent; and on larger withdrawals it’s 30 per cent.”
“Due to the low withholding on these withdrawals you may have to pay quarterly tax instalments the following year. Many people are surprised the first time they get an instalment notice from the Canada Revenue Agency,” he continues. “When you add in other sources of income that has little or no tax withheld, such as CPP and Old Age Security, you could have a large balance due at tax time.”
But there can be ways to cut the amount of taxes you owe.
“If you’re retired and taking the minimum amount from an RRIF, there may be little or no withholdings,” Jessup explains. “And, under the right circumstances, as much as half your pension income can be split with your spouse. Depending on how much he or she earned during the year, doing so can significantly reduce the taxes you’d otherwise have to pay. It can also keep you from being subject to the claw-back on your Old Age Security”
Each individual situation is unique, Jessup cautions. To be sure you’re aware of all your options and opportunities, it’s wise to consult a Chartered Accountant who will help evaluate your personal circumstances and come up with a plan that’s right for you.
Brought to you by The Institute of Chartered Accountants of Ontario