Q&A: Pension Credit

You can get $2,000 a year tax-free or at a reduced rate. Here’s how.

 

Q – In a recent article you stated: “Once you turn 65 move just enough money into a RRIF to allow for a $2,000 annual withdrawal, which is eligible for the pension income credit.”

Although I’m a few years away from 65, I am starting to more actively plan for that date and am going to semi-retire from my consulting practice in April. 
This is the first time I’ve heard of this strategy. What benefit does it provide? – Taras P.

A: The pension income amount allows you to claim a 15% tax credit on your federal return for qualified income. This can be from a registered pension plan, annuity, or, if you are 65 or older, a RRIF. CPP and OAS payments are not eligible. The maximum amount that can be claimed is $2,000, which works out to a tax credit of $300 ($2,000 x 15%). If you are in the lowest tax bracket, the credit eliminates all federal tax on the $2,000. If you are in a higher bracket, it reduces the effective rate. For more information, go to www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/314/lgbl-eng.html. – G.P.

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