Paying the Piper

One change that occurs when you start drawing your retirement income is how tax is paid on the income. During your working years, tax is deducted by your employer and remitted on your behalf. You are left with your net take-home pay.

In retirement, however, that is a factor that you must look after yourself or in conjunction with your advisor or institution. And you will have several sources of income where this needs to be done. Direct remittance of tax is available on any form of income, including government retirement benefits.

It is important to approximate the total tax payable and deduct appropriate amounts from the various payments being made, especially in the first year of retirement. Failure to do this will result in a tax bill in the spring. If you have a non-registered investment account, money could be taken from it to pay the taxes due.

Some people face a situation where they have to pull money from RRSP accounts. Although this solves the problem of the current tax bill, it creates larger tax issues for the following year.

Direct remittance is particularly important in situations where retirement income begins mid-year, after several months of employment income has been received. It is likely that larger amounts will need to be remitted for the balance of that year.

Institutions holding and making payments to you from your registered income vehicles, such as your RRIF, LIF, LRIF, RLIF or PRIF, are required to withhold and remit taxes based on the level of payments made to you over the course of the year.

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