Multiple pensions can complicate retirement tax planning
Canadians with multiple workplace pensions often face complex tax challenges if they don’t strategically plan their withdrawals, according to a report in The Globe and Mail.
This issue arises for individuals who have worked for different employers, have pensions from various periods, or have international pensions, all of which require careful coordination to manage effectively.
When workers change jobs, it’s common to leave pensions behind that may not be easily transferred. This leads to multiple income streams that don’t follow the same payout structure. Some pensions distribute income monthly, while others may have a less predictable schedule, which complicates budgeting in retirement.
Cody Weber, a certified financial planner and owner of Basic Financial Services Inc. in St. Catharines, Ontario, told the Globe that the unpredictability of these income streams is one of the key hurdles.
To mitigate this, Weber works with clients to establish a reliable "retirement paycheck," a strategy that provides a clear structure for retirement income, allowing for more effective financial planning.
Tax treatment is another important consideration. Some workplace pensions do not deduct taxes automatically, which can result in retirees underestimating their tax liabilities. For example, someone earning $70,000 from various pensions may need to set aside around $13,000 for taxes, although Weber advises that clients consult with their tax preparers for precise estimates.
In addition to pension payouts, Canadians must also account for other sources of retirement income, such as Canada Pension Plan (CPP) and Old Age Security (OAS) benefits.
Weber suggests that retirees should aim to stay below the $93,454 net income threshold in 2025 to avoid the OAS clawback, which reduces the amount of OAS benefits.
One potential strategy for retirees is to delay CPP and OAS benefits until age 70, instead withdrawing from registered accounts in the interim. This approach can help reduce the overall lifetime tax bill, depending on health and other factors.
For couples, income splitting offers another way to manage taxes. Anna Golan-Reznick, certified financial planner at Objective Financial Planners Inc., explains that Canadian pension income can be split between spouses, potentially reducing the overall tax burden. However, foreign pensions, such as U.S. 401(k) plans, do not qualify for this tax benefit.
Foreign pensions introduce further complexities. For example, 401(k) withdrawals come with a 10% penalty if taken before age 59½. Despite this, early withdrawals can be beneficial if made while in a lower tax bracket. Additionally, foreign pensions are often subject to withholding taxes, though tax treaties may reduce or eliminate this burden for certain countries.
