While the allure of sunny days makes summer a popular time to retire, financial advisors warn that leaving your job mid-year creates a unique set of tax challenges that require proactive planning. Unlike a clean December break, a summer exit means managing employment income earned in the first half of the year alongside new retirement income streams.
The Mid-Year Tax Planning Window
Greg Keith, a certified financial planner (CFP) with Wealth Plan Atlantic Inc. in Saint John, emphasizes that by June, a client has typically earned half their annual salary. The key risk is that adding pension payouts, government benefits, and investment withdrawals could push the retiree into a higher marginal tax bracket for the entire year. "It creates a unique tax-planning window," Mr. Keith says. "The goal is to avoid piling too much taxable income into the same year."
Advisors must map out every anticipated dollar of income for the calendar year. This includes January-to-June employment pay, any vacation payouts, unpaid bonuses or severance, as well as Canada Pension Plan (CPP) and Old Age Security (OAS) benefits. Withdrawals from registered (RRSP/RRIF) or non-registered accounts must also be factored into the annual total.
Navigating Key Pitfalls: OAS Clawback and RRIF Rules
For clients over 65, a major concern is the OAS recovery tax, or clawback, which for 2025 begins at an income of $93,454. Mutaz Dirar, a financial advisor with Edward Jones in Waterdown, Ont., notes that a large bonus or buyout package can make this threshold hard to avoid. One strategy, according to Mr. Keith, is using Tax-Free Savings Account (TFSA) withdrawals for spending needs, as they do not increase taxable income.
For lower earners, there may be an opportunity to make a strategic RRSP withdrawal in the retirement year while still in a lower tax bracket. Doing this before the RRSP must convert to a Registered Retirement Income Fund (RRIF) at age 71 can also reduce the account size, leading to lower mandatory RRIF withdrawals later.
However, Adam Chapman, CFP at YESmoney in London, Ont., points out a RRIF conversion trap for mid-year retirees. While converting an RRSP to a RRIF mid-year can allow for the pension tax credit and income splitting, a RRIF established after January 1 does not require a minimum withdrawal until the following year. "Without a set minimum, the full RRIF withholding tax rate applies to every dollar withdrawn for the year," Mr. Chapman explains. This can force retirees to draw more from their portfolio than necessary to cover the tax withheld.
The Importance of Starting Early with Your Advisor
All advisors stress the need for clients to begin discussions well before their last day of work. Mr. Chapman spends weeks crunching numbers to ensure clients have sufficient cash reserves and money set aside for income taxes without triggering unnecessary new taxable income. He also notes that new retirees often want to spend more in their first year, typically on travel, which must be planned for.
"Our job as planners is to make that transition as smooth as possible, but we actually need enough notice to be able to make it smooth," Mr. Chapman says. "We need to figure out how much the client needs to withhold on all these different sources. It’s one of the biggest things retirees look to advisors to help them sort out."
The consensus is clear: the more control you have over the timing and composition of your income in your retirement year, the better your financial outcome will be. Early and detailed planning with a qualified advisor is the best way to enjoy your summer retirement without a tax-season surprise.
