A No Tax Retirement?

It occurs to me that perhaps every one is going about their retirement planning in the wrong way.  You see I’ve been looking at factors around retirement to determine which ones are really significant.  Like what happens to your plan when your rate of return on your investments is only 6% when you planned for 8%.  Also what happens if you save more and less.  Yet after all this factors I’ve looked at your tax bill is likely the most important after all in Saskatchewan after the basic deduction you pay $0.26 in tax on every dollar you take from your RRSP in retirement.

So if you are a couple that uses your basic deductions in Canada you can take in $9600 each for a total of $19,200 with out paying a single dime in tax.  At this point it doesn’t matter if the money comes from your RRSP account or interest on your savings account or even dividend income.  You will pay no tax after you file your tax returns.

Yet another important feature of our tax system is that fact dividend income in the lowest tax bracket generates a larger tax credit than the dividend (if it is in a taxable account).  So you can actually earn more than the basic deduct and still pay no tax depending on how careful you are to structure your investments in and out of an RRSP.

So this brings me to a wild idea I would like some feedback on.   Why am I exposing myself to extra risk in the stock market when I can make a killing off my RRSP investment just on the tax brackets?  For example, let’s say I get some help from a tax planner and structure my investments to ensure I pay no tax in retirement as long as I live a life with modest spending and I don’t have any debt.  I can make 35% off putting money into my RRSP (35% is my current marginal tax rate – a future tax rate of zero) and making sure it keeps pace with inflation (for example, using real return bonds).  If I can make 35% that way, why do I risk that in the market at all?  I understand some equity exposure may be required to keep up with inflation, but honestly I could have 70% of my RRSP investments in real return bonds.

So what is really scary about this idea is if you apply it to those in the highest tax bracket.  You could be making over 40% returns just on tax brackets alone.

So am I crazy or on to something?  Please feel free to provide feedback and poke holes in this idea.

8 thoughts on “A No Tax Retirement?”

  1. I’ve read that the number is roughly $22,000 province dependent. So a combined income of $44,000 tax free is more than reasonable for a couple to live on. In fact, you may not even need to be completely debt free and still be able to get by on that amount, depending on your lifestyle.

    The tricky part is building up a retirement account that will actually provide you with that amount of annual distributions.

    If I’ve missed something in the interpretation let me know!


  2. What you’ve described is effectively an extremely frugal retirement, where a couple keeps their expenses low enough to avoid any taxation.

    In addition to the standard personal exemption, there is also a Pension Income Tax Credit (a non-refundable tax credit of $2000 federally and varying amounts provincially) that would assist in doing a “tax free” retirement.

    Bottom line, though, is that you’d have to be frugal enough to keep your expenses below approximately $2000 per month (in today’s dollars). One would hope that the personal exemption and pension income tax credit go up with inflation, but that’s certainly not guaranteed.

    I think it’s a reasonable goal to strive for, but there are a lot of pitfalls to bear in mind. If, for example, you have too much money in your RRSP, you may be stuck withdrawing more than you want to at a certain point. At age 69 you need to convert the RRSP to a RRIF or annuity, and RRIFs require mandatory minimum withdrawals, expressed as a percentage of the account balance each year.

    I think it’d be possible to limit your income to $2000 a month or so and still live fairly happily, especially if you have your home paid off, don’t need the money for children’s college funds, and have a decent amount of medical coverage through your (former) employer.

    Unfortunately, such a plan would rule out international travel (even to the USA) as a retirement goal – in some cases the cost of travel medical insurance for seniors can exceed the cost of their flight and hotel combined.

    Personally, I’d rather have a large enough wad to play with, such that I could handle any tax bills that come due without worry…

  3. CD, another thing you might want to consider is something like the RRSP meltdown when it comes time to withdraw from your RRSP. Basically get an investment loan with payments equal to what you would like to withdraw from your RRSP. That way, the withdrawal and the tax deduction result in a tax neutral situation.

  4. Don’t forget that if you’ve lived and worked in Canada for a while you’ll be getting CPP/QPP and OAS.

    Don’t know the exact numbers but it should be about the same amount as the entire personal tax credit, so everything that comes from your RRSP will at least be taxed at the lowest bracket level.

  5. A second point, 35% inflation-adjusted return is not very much if you’re far away from retirement.

    I’m 30-35 years away from retirement, and I hope my current savings will double more than 3 times in raw dollars before I retire. If my equity-heavy portfolio can return 6% above inflation it would result in more than 700% return on today’s investment.

  6. DM,

    Thanks. That was the little piece I was missing. The 35% is not compounding, so over a long period of time a 4% return above inflation would still be a much better deal.

    Thanks for your thoughts everyone,


  7. Although not paying taxes might sound appealing at first glance, shouldn’t it raise some ethical questions ? If everyone decided to go that route, our social programs wouldn’t be sustainable. I’d certainly feel like I’m ‘milking the system’.

    Arguably if you are paying a lot of tax during your working life (higher tax brackets), you might as well consider this as a form of payback.

  8. “Arguably if you are paying a lot of tax during your working life (higher tax brackets), you might as well consider this as a form of payback.”

    Hear hear!!

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