Boomers should mind their taxes: BMO study

Baby boomers who fail to implement a long-term financial plan early in their retirement years are at risk of having their government benefits and credits clawed back, warns the BMO Retirement Institute.

The institute’s report, Mind Your Taxes in Retirement, shows that many boomers aren’t savvy enough when it comes to understanding how they are taxed, and failure to adopt a long-term approach leaves them vulnerable to having benefits and credits such as Old Age Security (OAS) and the Age Credit clawed back.

Of those surveyed, 79% did not know how dividend income and capital gains are treated from a tax perspective, 34% did not understand how interest income is treated from a tax perspective and 41% 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.”

Almost half (47%) of retired survey respondents said they rely on OAS as one of their main income sources. However, since OAS is an income-tested benefit, it could be taken away if a recipient exceeds a certain income level. As such, it’s crucial that retirees are aware of their income level and tax bracket in order to preserve the benefit. Yet only 21% of survey respondents knew their tax bracket after retirement.

The institute offers the following suggestions for minimizing taxes and maximizing retirement revenue:

Manage retirement income wisely. For some, this may mean converting RRSPs to RRIFs before age 71 and taking out more than the minimum required amount during the transition years between retirement and the age at which government benefits start to apply.

Seek (TFSA) shelter from the storm. Seniors who cannot bear to see their RRIF funds wither through tax payments can continue sheltering their funds through a Tax-Free Savings Account (TFSA), which regenerates itself through a re-contribution mechanism and has no upper age limit.

Be aware. Seniors should understand how the different types of retirement income sources are taxed and consult with a financial professional as needed.

The full report is available at www.bmo.com/retirementinstitute.