As you plan to create a steady income after you retire, don’t forget about taxes. A dollar in a Registered Retirement Income Fund (RRIF) is not the same as a dollar from a savings account or even a loan. Once you understand how taxes will affect your income, you can make better choices to create the income you need.

How do taxes work on my sheltered (or registered) retirement savings?

•   You pay tax on any money you take out of any registered plan. This includes money coming from your workplace pension or an annuity you bought with sheltered savings.
•   Your tax bill depends on your marginal tax rate. Your rate will be lower after you retire, if your income drops.

Splitting your pension income with your partner can help reduce the tax you pay. Starting in 2007, you may be able to share up to half of your pension income with your spouse or common-law partner each tax year. If you are age 65 and over, you can share lifetime annuity payments under a registered pension plan, an RRSP or a deferred profit-sharing plan, and payments from a RRIF. If you are under age 65, you can only share lifetime annuity payments from a registered pension plan and, in some cases, payments you receive after the death of your spouse or common-law partner.

Tip: Sometimes you have to pay tax right when you withdraw your money. This may happen, for example, if you take out more than the required yearly minimum amount from your RRIF. The government withholds the tax up front, deducting it from what you take out of the plan. For many people, it’s best to avoid this if possible.

How do taxes work on my unsheltered savings?

•   There is no tax to pay when you make a withdrawal. That’s because you have already paid tax on this money.
•   You do pay tax on the money you make investing your unsheltered savings. This includes taxes on capital gains, dividends, interest, and the taxable part of any annuity payment.

How do taxes work on money that I borrow?

• There is no tax on money you borrow against the cash value of your life insurance policy. You do pay tax if you withdraw money from the cash value.
• There is no tax on money you get from a reverse mortgage. But be careful: the interest on these loans can add up.

How much tax will I pay?

This chart shows how much tax you would pay if you took $10,000 in income from different sources. It assumes your federal/provincial tax rate is approximately 35%.

Remember: Taxes can really change how much you get from your savings.

Your unsheltered savings can help you create stable income while you keep taxes low. The challenge is to line up these savings with your other sources of income so that you get the income you need.