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How to Reduce Taxes on Retirement Savings 


In the last few years leading up to your retirement date, you’re in the home stretch — when it’s really important to be smart about maximizing your savings. As you near your late 50s and early 60s, there are some investment strategies to consider, especially if you want to reduce taxes — and who doesn’t?

When you hit the five-year mark before retirement, you start to ask yourself many questions. Have I saved enough? Am I using my savings accounts in the best way? How do I decide what my income in retirement should be? How much tax will I need to pay each year? To get answers, look at the savings accounts you’re using. You may be on the right track, or there might be ways to alleviate your tax burden in the last few years before you retire.

Also, whether the end of your career is twenty, ten, five or two years away, the best strategy is to have a plan today. Don’t wait to start exploring ways to reduce taxes on retirement savings. Get tips on saving for retirement in your 20s and 30s.

3 options for reducing taxes on retirement savings

Everyone is on a different financial path, but there are a few tax-efficient savings options that should be at the forefront of your retirement savings plan:

1. Registered Retirement Savings Plan (RRSP)

The Canadian government created RRSP accounts in 1957 to help Canadians save for retirement. If you’re not using an RRSP to save for your retirement — no matter your age — you should consider opening one today.

The taxes on any RRSP contributions are deferred until you retire. For example, if you make $80,000 a year and contribute $10,000 to your RRSP, the Canada Revenue Agency (CRA) will treat you like you earned $70,000 during tax season.

It is a smart strategy to contribute what you can to your RRSP while you’re working. Keep in mind that RRSP accounts do have contribution limits: 18% of income earned (that was reported the previous year on your tax return), up to a maximum in 2020 of $27,230. Contribution limits can increase annually, and being a contributing member of a pension plan will also affect these caps.

RRSPs are tax-deferred accounts, not tax-free. When you retire and withdraw dollars from the account, you’re going to owe taxes. The important thing to remember is that your income is probably going to be much smaller in retirement, so you’ll be paying less in taxes than you did while you were working.

Find out how to convert your RRSP to a RRIF when you turn 71.

2. Tax-Free Savings Account (TFSA)

When you’re looking for a tax-free way to save and invest, a TFSA is a smart retirement strategy.

A TFSA is a registered account that was introduced in 2009. It allows investment income and capital gains from qualified investments to grow tax-free. The government sets an annual contribution limit, but if you don’t use it you don’t lose it! Any unused contribution room accumulates so you can catch up at any time.

Tax-Free Savings Accounts can also help avoid clawbacks. The government has programs in place to support Canadians in retirement, including the Old Age Security (OAS) pension. If your income exceeds the income threshold that the government sets, your payments from these programs are reduced  — also called a clawback.

TFSA contributions are not tax-deductible, which makes them different from RRSPs. However, withdrawals from the account are tax-free. You also don’t have to collapse a Tax-Free Savings Account when you reach a certain age, like you have to do with an RRSP. 

3. Income Splitting

When using RRSPs and TFSAs, income splitting can help reduce taxes on retirement savings. For married and common-law partners there are a few ways to do this:

  • Spousal RRSPs
    RRSP contributions are based on a percentage of earned income, so income splitting can boost a lower-earning spouse’s retirement income. The higher-income earner can also contribute a portion of their allowable annual contribution, which enables the couple’s savings to build up more equally. The more evenly-distributed income in retirement would then be taxed at a lower rate.
  • Spousal TFSAs
    Although there isn’t a spousal TFSA in the same way there is a spousal RRSP, you can give dollars to your partner to contribute to a TFSA in their own name. The tax deduction won’t be the same as in an RRSP, but the income earned on money invested in a TFSA is tax-free. Contributing to your spouse’s TFSA could help both of you max out the contribution limits, which grows your overall savings.
  • Pension income splitting
    If one spouse is receiving a pension, there are benefits to splitting the income. Half of your pension can be allocated to a partner, which will lessen the tax burden of the pension and reduce the overall amount of combined tax you pay as a couple. Income from a Registered Retirement Investment Fund (RRIF) can also be split if the taxpayer is over 65.  


Get expert advice on how to reduce taxes on retirement savings

Lowering taxes throughout the years can really help grow your retirement savings. There are many ways to maximize your retirement income while minimizing taxes. Contact our Member Advice Centre or email us to speak to an advisor to decide which strategies will give you the retirement you’ve always wanted. 


Mutual funds, other securities and securities related financial planning services are offered through Qtrade Advisor, a division of Credential Qtrade Securities Inc. Mutual funds and related financial planning services are offered through Qtrade Asset Management (a tradename of Credential Asset Management Inc).Financial planning services are available only from advisors who hold financial planning accreditation from applicable regulatory authorities.