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Starting at age 65, you can claim the pension income tax credit, a 15% federal credit on up to $2,000 of eligible pension income (a provincial pension income tax credit is also available). It’s a credit worth taking advantage of, since it saves many taxpayers hundreds of dollars a year.
Eligible pension income includes income from a Registered Retirement Income Fund (RRIF), payments from a registered pension plan (RPP), annuity payments from a Registered Retirement Savings Plan (RRSP) and other sources. Canada Pension Plan (CPP) and Old Age Security (OAS) benefits are not eligible.
So if you have a pension plan from your employer or other eligible pension income, you’re good to go. But what if you don’t have eligible pension income at age 65? Fortunately, you can create it, with a proven strategy.
All you need to do, from ages 65 to 71, is convert a portion of your RRSP to a RRIF – just enough so you can withdraw $2,000 from your RRIF each year. That’s your eligible pension income that will trigger the tax credit.
If you don’t need the money to support your retirement, you may wish to keep the tax-smart moves going and contribute the $2,000 each year to your Tax-Free Savings Account (TFSA). By the end of the year you turn 71, the RRSP will be converted to your RRIF and you won’t need the strategy anymore.
If you’re interested in this pension income credit strategy, talk to us and we’ll determine if it works with your tax situation.