Introduction to Retirement Tax Credit
The retirement tax credit is a valuable benefit for individuals who have reached the age of 65 and are receiving income from a Registered Retirement Income Fund (RRIF) or Life Income Fund (LIF). However, this tax credit isn’t a big deal for most people, and in some cases, it’s better not to convert a Registered Retirement Savings Plan (RRSP) or Locked-In Retirement Account (LIRA) into an RRIF or LIF in order to qualify for the tax credit.
Understanding the Tax Savings
In 2025, the maximum federal tax savings is $290. If you take the provincial loan, you can save a little more, as it varies depending on the province. In Ontario, the additional tax savings are $89. That means the total tax savings for everyone in Ontario is $379, assuming they pay at least $379 in taxes. If you cannot use the full balance, you can transfer the amount you cannot use to your spouse.
Be Aware of the New Tax Rate
As of this year, the lowest federal tax rate was reduced from 15% to 14%. The tariff did not come into force until the end of June or the middle of the year. Therefore, the lowest federal tax rate and pension tax credit for 2025 is 14.5%. Next year, both will be 14%. Also, note that claiming the $2,000 retirement tax credit is not a way to get $2,000 tax-free out of your RRIF/LIF.
How the Retirement Tax Credit Works
The $2,000 federal tax credit applies a tax rate of 14.5%, and the tax savings are $2,000 x 14.5% = $290. A rate of 5.05% is applied to the $1,762 Ontario credit, resulting in a tax savings of $1,762 x 5.05% = $89. Both together result in a tax savings of $379. Now, think about what happens if you withdraw $2,000 from an RRIF or LIF. If you’re in the lowest tax bracket in Ontario, with a marginal tax rate of 19.55% (14.5% federal + 5.05% provincial), you’ll pay $2,000 x 19.55% = $391 in taxes.
Tax Implications for Different Tax Brackets
If you apply the $379 retirement tax credit savings, you’ll end up paying only $12 in taxes on the $2,000 withdrawal. The situation is different for a person in the highest tax bracket with a marginal tax rate of 53.53%. A $2,000 RRIF or LIF withdrawal results in a tax bill of $1,070 before the credit is applied and a tax bill of $681 after the retirement tax savings of $379. A person with income of about $100,000 will have to pay about $240 in taxes after claiming the credit.
Planning for Retirement
This leads to the next question for the person who only receives the $2,000 to receive the retirement tax credit. Does it make sense to withdraw the money and reinvest the smaller amount after taxes, or would it be better to leave the entire $2,000 in the RRIF or LIF to grow? This becomes a planning issue. What are your spending and gifting plans?
What the Pension Tax Deduction is Good For
The most common way to claim the pension tax credit before the age of 65 is to take life annuity income from superannuation or employer pension plans. You can claim the credit even if you are under age 65 and receiving retirement benefits due to the death of a spouse who was eligible for the retirement tax credit. Another benefit of the retirement tax credit is the ability to split retirement income. If you have a defined benefit pension plan, you can share your retirement income with your spouse before age 65.
Conclusion
In conclusion, the retirement tax credit can be a valuable benefit for individuals who have reached the age of 65 and are receiving income from a RRIF or LIF. However, it’s essential to understand the tax implications and plan accordingly. The credit can be claimed before age 65 in certain circumstances, and it can also be used to split retirement income with a spouse. By understanding how the retirement tax credit works and planning carefully, individuals can minimize their tax liability and make the most of their retirement income.