The Citizen, 2010-02-11, Page 7THE CITIZEN, THURSDAY, FEBRUARY 11, 2010. PAGE 7.The downturn in the economy has
many of us rethinking our retirement
plans.
But if you’re one of the lucky ones
whose pension plan, smart investing
or company separation package
make it possible for you to retire
before the standard age of 65, there’s
a lot to consider before you say your
final goodbye to the workplace.
Chartered accountant Jason Safar
is a tax partner in Hamilton. He
routinely counsels clients on
business and retirement issues, and
offers some important tips for people
who are considering early
retirement.
1.Know what you’re running
to, not just from.How will you fill
your days when there is no work?
“Human interaction and activity are
important for well-being,” Safar
says. “Some of us are eager to get
away from a particular job or
employer, but retiring from work
without planning how you’re going
to spend your new-found leisure
time can be a recipe for misery.”
2. Know what it costs you to
live.People tend to spend what they
earn – so, if your income drops when
you retire, will you still be able to
support your current lifestyle?
History is a good fortune teller. Safar
recommends that you take the time
to wade through last year’s receipts
and find out where your money goes,
and where you can cut back if
necessary.
3. Get your family’s buy-in for
the plan.Change of any kind can be
stressful. Spending more time at
home (maybe with less income) can
be an adjustment for family, too.
“Especially,” Safar says, “if you’re
leaving a family business in which
your children or other family
members are still involved. While
the ultimate decision to retire must
be yours, consider how the change
will affect your loved ones.”
4. Understand your income
streams. Money in RRSPs can be
withdrawn at any time, but it must
all be allocated elsewhere by the
time you’re 71. And remember:
RRSP savings are taxable when
they’re withdrawn. Other vehicles
may be locked-in until you reach a
certain age, like pensions and LIRAs
(locked-in retirement accounts).
How you draw down on different
sources of income can have dramatic
implications come tax time. So,
Jason suggests that you think this
through carefully and get
professional advice if you are unsure
of the consequences.
5. A change can be as good as a
complete rest. Retirement doesn’t
have to be an all-or-nothing
proposition. “These days,” Safar
says, “many employers are open to
flexible work arrangements. Part-
time, temporary or consulting work
for a few months at a time can be a
win-win situation for employers and
potential retirees. It’s worth
consideration and a discussion with
your boss or human resources
department before you jump into full
retirement.”
– Institute of Chartered
Accountants of Ontario
Many baby boomers are ready to
retire with the largest transfer of
wealth ever between generations.
How can the older generation
transfer their hard-earned wealth
effectively while the fortunate
recipients make arrangements to
receive their inheritances?
Chartered accountant Sharon
Brown in Guelph has these tips to
make the processes efficient and
successful – for both generations.
Planning for an Inheritance
• Make your will as flexible as
possible.
• Consult with a CA tax
practitioner as well as a lawyer, to
ensure that your will maximizes
tax-planning opportunities.
• Provide for a specific
testamentary trust if the size of the
estate warrants it and then allow an
early distribution of capital by the
Executor or even an eventual
collapse of the trust.
• If the estate is held in a
testamentary trust, it can
significantly benefit the
beneficiaries, who will still have
the same access to the income and
assets, but pay less tax. Instead of
allocating all of the income earned
in the estate to the beneficiaries
(who will have to add that income
to their current income), the
executors can elect to have some or
all of the income taxed in the trust
and then distribute the after-tax
income to the beneficiaries. This
can result in significantly lower
taxes for the heirs compared to
them receiving the inheritance
directly.
Receiving an Inheritance
Develop your own plan first –
money can disappear quickly, so
decide what you want to do with
your inheritance – including
investing it and keeping it intact for
your children, paying off your
mortgage, topping up your RRSP,
paying off debts, or donating to
charity.
• Consult an investment adviser:
1. In choosing an adviser,
interview two or three
professionals, choosing the one
with whom you feel most
comfortable. As much as it’s
about the money, it is also
about having a trusting
relationship. Make sure your
adviser understands your
objectives and will develop a
plan suited to your needs.
2. Assuming this is an
inheritance from your parents,
you may decide to use their
financial adviser. You can also
obtain a reference from other
family members, friends or
your chartered accountant.
• Prepare a will to recognize these
new assets, or review your current
will to ensure that it is still
appropriate.
• Prepare a power of attorney. If
you already have one, review it to
ensure that the designated person is
willing and capable of handling
your affairs and inheritance.
• While there are no tax
consequences to you on the amount
of the inheritance, consult a CA if
you have a substantial inheritance,
and have your tax return prepared
by a tax professional. Your tax
return will be more complicated,
particularly if a large investment
portfolio is involved.
Brown concludes, “Each situation
is unique, so consult a team of
advisers, including a CA, lawyer
and investment professional, to
ensure your planning benefits from
the different areas of expertise.”
– Institute of Chartered
Accountants of Ontario
Tips to help you begin an early retirement
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Plan and manage your inheritance
While RRSP savings can be
withdrawn at any time, don’t forget
that any amount you take out will
count as taxable income for that
year.
Is it prudent, then, to leave a
certain amount behind in the bank to
pay the taxes?
“There are many variables that
determine the amount of income tax
you’ll have to pay when you
withdraw funds from an RRSP,”
says chartered accountant Gordon
Jessup, of Toronto.
“The withholding tax on
withdrawals is usually very low,” he
explains. “On a lump sum of up to
$5,000, it’s 10 per cent; on amounts
over $5,000 and up to $15,000, it’s
20 per cent; and it’s 30 per cent on
amounts over $15,000.”
But if you have other sources of
income, these amounts may not be
sufficient to cover the amount of
taxes you’ll owe.
“You may have to pay quarterly
tax installments,” Jessup
continues.
“The first time, many people are
surprised at the amounts. But
sometimes, there are options or
strategies that can reduce what you
owe.
“If you’re retired and withdrawing
minimum amounts from an RRIF,
there may be little or no
withholdings.”
Jessup recommends you consult a
chartered accountant who will
assess your personal situation and
help you find the best plan to suit
your needs.
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