Cha-ching? When to cash out your RRSP
Largely because I’m working full time and these are my contribution years, I haven’t put too much thought into making any withdrawals from our Registered Retirement Savings Plans (RRSPs). Enter my parents…
When should they cash out their RRSP?
Parents case study – when to cash out the RRSP
Now both of my parents are fully retired, I’m exploring RRSP withdrawal strategies to learn more what might make sense for them, and for us eventually.
Today’s post will provide some insight into my thinking and provide a bias for cashing out the RRSP before my parents are forced to collapse the account.
Is there a best time to withdraw money from an RRSP account?
Yes, I believe so and my response will be provided below. First though, because RRSPs are designed as a tax-deferred growth account and investors receive a tax-credit associated with RRSP contributions, it would seem to make sense to keep money in this account for as long as possible.
The rules of the RRSP are constructed to encourage investors to keep investments (e.g. individual stocks, Exchange Traded Funds (ETFs), mutual funds) inside the account until they are forced to collapse it or convert it; in the year investors turn age 71.
Does that really make sense – to keep the RRSP intact as long as possible?
Yes and no.
I would say no if investors are fortunate enough to have solid pension plan(s) in retirement and are getting modest Canada Pension Plan (CPP) or Old Age Security (OAS) payments.
These investors who have RRSP assets, have CPP and OAS income streams should at least consider withdrawing RRSP assets before the end of the year they turn age 71.
Why do I feel that way?
RRSPs are a tax-deferred account but you can also think of this as a long-term-government-loan-account.
If you’ve been an astute investor over the years, you will have contributed most of your money to an RRSP in your highest income years with the intention of withdrawing money out of it in your lowest income years. This strategy would see you optimize the tax differential benefits provided by this account and defer taxes on the investments that grow within it.
For this reason, I think RRSP contributions make little to no sense for low income earners and these individuals are better off maximizing their Tax Free Savings Account (TFSA) and/or paying down any debt.
Conventional thinking on its head – cash the RRSP out!
One common approach I hear financial experts write about is using up your non-registered money first and leaving RRSP withdrawals until the end.
If some investors wait to convert their hearty RRSP accounts into Registered Retirement Income Funds (RRIFs), based on RRIF minimum withdrawal requirements, they’ll pay more tax.
In fact, my parents will likely be pushed into a higher tax bracket if they wait to convert their RRSPs to RRIFs in the year they turn age 71. I think as a senior that’s the last thing you want.
As far as other RRSP conversion options go, I’m not convinced an annuity is a good idea based for them on their secure pension plans and there is no clear need for additional fixed income now.
Are there any next steps?
It’s going to take me more time to think through all the options for them but my parents are likely to start tapping into their RRSPs before age 71. The math, for them, seems to suggest small annual RRSP withdrawals (over the next few years) are an excellent way to wind down their RRSP account. They can smooth out taxes this way.
After RRSP withholding taxes are paid, money that is left over should find a good home in a self-directed Tax Free Savings Account (TFSA) for them.
Using the self-directed TFSA, investments my parents choose inside this account can grow tax-free and any withdrawals made from the TFSA will not be subject to government income-tested programs like their Old Age Security (OAS) payments.
What’s your take on cashing out RRSPs – hold ‘em until you’re forced to fold ‘em?
Let me know your thoughts!
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and now investing beyond the 7-figure portfolio to start semi-retirement with. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
IMNSHO, contributors to these discussions, generally speaking, mistakenly focus their attention on minimizing taxes when they should be focused on maximizing (after-tax) money in their pocket.
For example: if, say, leaving monies in an RRSP longer results in greater growth (than if the monies were withdrawn earlier) and thus results in larger taxes being paid when they are withdrawn then this strategy also results in more after-tax income to the plan holder because taxes are never 100% – all other things being equal.
Now there are a number of complicating factors to consider such as the tax bracket applicable to these monies at the time of withdrawal (affected by pension income, CPP income and OAS), pension splitting (where applicable) and also the OAS Recovery Tax.
Complicating the issue further, tax brackets, the Personal Deduction, CPP and OAS are (roughly) indexed to inflation.
Nevertheless the focus should be on maximizing money in your pocket and if your strategy gives those tax guys more as well so be it.
With a little time and thought (and some assumptions about inflation and investment returns) a spreadsheet can be constructed even by an amateur such as myself that reveals the ‘sweet spot’ for given circumstances.
Thanks for the feedback.
Definitely a number of complicating factors to consider and the more the government layers on complexities, the worse things get.
All that said, OAS clawbacks if you have a large RRSP balance sheet are great problems to have!
I am looking into this as well . look on youtube “Precedence Private Wealth” . they have come up with a way of converting RRSP with paying only a small amount of tax .
There is also the opportunity to take advantage of GIS as well.
https://edrempel.com/make-your-retirement-comfortable-with-the-8-year-gis-strategy/
Thoughts?
Mark
Just because one can manipulate a system designed to keep the most impoverished people from starving or freezing to death, doesn’t mean that you have to do it. And, just because someone else is doing it, it doesn’t mean you have to also do it. The end result could be that you ultimately f*** it up for those who desperately need it.
That’s my initial thoughts on that particular subject.
Strong points!
Mark
Yea, sorry about that. I witness both ends of the financial spectrum and the desperation of some families. It’s not always their fault that things worked out so badly for them. Please feel free to delete my last “strong” statement. I don’t want to lower the tone of this excellent blog.
Bob
All good Bob. I want passionate and respectful readers on this site who feel free to speak their mind. Makes for good learning!
Mark
These are all great comments and good advice to consider. I have however not yet seen the question that is on my mind and wonder if I may have missed it?
My situation is that I am retiring early 2019 and will have large mortgage approx.$200k. I never planned to retire with a mortgage however my personal circumstances changed resulting in my current living arrangement and still with a mortgage.
I am concerned about cash flow and my desire to live comfortably on retirement income which will include company pension and cpp oas. I also have 500k rrsp and have not decided when I will start drawing down.
I currently have sufficient non registered investment fund in form of bank stock that I am wondering if I should cash in…pay capital gains and eliminate the mortgage. What is your opinion on how wise or practical this would be?
My financial adviser has suggested that I purchase a life insurance policy of $400,000 to cover the income taxes which will be incurred when I die. This at a cost of about $17,000 a year. Most of my investments are in RRSP’s.. My income is such that I cannot withdraw without raising my tax rate and incurring clawbacks from OAS. I am thinking that it might be better to remove the money from RRSP’s now – pay the tax and incur the OAS clawback as I would pay less tax now than I would if I wait until I die. $17,000 seems like a lot of money to pay for insurance when I don’t know how long I will live. I am 66. What do you think?
I can’t offer specific advice Linda but if you’ve been advised to buy life insurance to cover your final tax bill I suspect you have a great amount of assets to cover off – a good problem I guess since you intend to leave an inheritance?
If you have no major plans to leave a sizeable estate, again, your call, I would certainly suggest you spend the money now and enjoy it or gift it away while you’re alive. I absolutely agree – I think $17K is a pile of money to cover tax liabilities.
Personally I’m a fan of owning enough insurance to cover what you can’t self-insure yourself, against a financial loss. Otherwise spend and enjoy the money – you can’t take it with you.
A great suggestion if you are an insurance salesman ! Income taxes owing are easily calculated using online calculators and setting up a little number cruncher on a spreadsheet to balance the benefits of withdrawal sizes ,resulting taxes owed and by massaging ( adjusting withdrawal size) the calculation to keep your taxes due to a minimum. A lot of professionals like to make the exercise complicated and confusing with the end result a sale for them. Depending on your TFSA limits, the carryforward contribution room leaves some a lot of room pay taxes at a minimum amount , maximize tax free income from dividends,interest etc. Remember that $17K is a lot better in your pocket than a salesman’s and possibly even more if the premium increases with age and by the time you realize the futility of insurance, its too late, and you can’t recover from that expense.
Financial professionals (some, not all) tend to do what profits them. That includes insurance. The TFSA can be great for retirement income planning and any estate planning IMO.
I have been scouring the internet looking for opinions on retirement options. I plan to retire next year at age 55, I currently have a defined benefit pension as well as RRSP, TFSA’s. I am debating the option of deferring my pension payments for a few years for 2 reasons, one to lesson the penalty that I will take for each year before age 65 and to reduce my taxes by cashing in my RRSP’s as my only income during that time instead. Pros cons? thoughts?
I think if you can lessen the penalty that’s always a good thing. Rhonda, did you check out this follow-up/recent post?
https://www.myownadvisor.ca/rrsp-withdrawal-strategies-before-age-71/
Lots of good comments here.
Hello, I am just a tad late to this conversation but, very interesting posts. I have visited several of the links, great reading.
My query is: has anyone read and critiqued the ‘Retail Investor’ website thinking regarding the early withdrawal of RSP money? The site has several links to the spreadsheets that explain why it is not a good idea. Can anyone explain and help me decide if that critique is valid or not? What is missing or not?
Thanks a million, F
Thanks Fred. I appreciate you reading the site!
I have not critiqued that site. I will try and check it out. Overall, I think cashing out your RRSP when your income is the lowest is usually a good plan. This of course assumes you have other income to cover basic living expenses. RRSP contributions should ideally occur when your tax rate is the highest and RRSP withdrawals occur when your tax rate is the lowest – and in doing so, you defer taxes for as long as possible.
Hope that helps!
Interesting and you are covering stuff that is rarely covered by official financial planners.
1st: you mentioned that RRSP is a government loan.
2nd: you mentioned that low revenue should not invest in RRSP
3rd: you mentioned that the logic of keeping RRSP for the end is not necessary good.
My two cents:
In Quebec – and some other province- the marginal tax rate is flat at 42% from 46K$ to 82K$. So if you are not making over 82$ and you are working somewhere with a good pension plan, you will never be able to cash your RRSP at a lower marginal rate.
First rule is: pay your Debt, including mortgage. Paying mortgage is a tax free interest placement! It is the equivalent go getting a RRSP of 6%. If you cannot get more than 6% from your RRSP, pay your mortgage, if you have any other debt with an interest rate higher than your mortgage rate, pay them first!
My Second Rule is to move everything you can from RRSP to TFSA, if you have room, then place it somewhere else, as long as you are under the 42% bracket.
Third, if you cash RRSP, do it by $10000 a year in January. You will then pay only paid 10% immediately so you will have $9000 to invest for 16 months. An additional $3200 will be paid in April the year after but you will have been able to use it during this period. If it was to pay debt at 5%, you will made near $200 net.
Thanks for the comment Hemgi.
Well said about the RRSP and MTR, the RRSP is great only if you’re withdrawing money in a lower (hopefully much lower) tax rate. If not, and you have not for whatever reason reinvested the RRSP generated tax refund, this is not a great deal for the investor.
Totally agree about debt, and I hate it as well.
Regarding use of the TFSA, when I make some TFSA room in another 10 years, I will transfer from RRSP > TFSA. Until then, I hope to max out the TFSA with stocks and ETFs.
I’ll be retiring at 55 and will be withdrawing just enough from my RRSP to bring me up to the 43K tax bracket threshold. I don’t need the money, but taking it out at a lower rate than I put it in at is just good sense. I’ll be investing it in some dividend stocks. I’ll also be transferring 50% of my LIRRSP to my RRSP just to give me more flexibilty. I started RRSPs at 19 and have more than enough assets (RRSP, LIRRSP, TFSA, property investments, etc) to last me my life time but I don’t see any purpose in giving the government more than I have to.
Congrats on that retirement plan Lloyd, retiring at 55 sounds great and based on your savings plan you’re in very good shape.
I think my wife and I plan on doing the same: withdrawing just enough from the RRSPs to remain in the low tax-bracket, like $5,000 per year starting age 55 or so.
We’ll take the money and use it for dividend stocks and broad-market ETFs. We’ll try and maximize our TFSAs in retirement this way: RRSP > TFSA. If TFSAs are full, money will go non-registered.
I want to retire at 55. I understand that I can convert a portion of my RSP to a RIF, I understand that there are minimum amounts I can withdraw…
I do have a company pension which I would like to collect at 60, so I wish to use my RSP savings in the 55-60 time frame as my sole income, is there a MAXIMUM amount I can withdraw from RIF? what are the tax implementations?
At 60 I will use my TFSA as income with my work pension and CPP I should be ok, then at 67 I’ll have OAP.
Does this all sound like a reasonable plan?
There’s no maximum withdrawal limit from the RRIF. Since you’ll be less than 71 when you start withdrawing, you can keep the RRSP without converting to a RRIF and skip the mandatory withdrawals throughout your 60s.
Good point Brian.
In my post, I wrote:
“One common approach I hear financial experts write about is using up your non-registered money first and leaving RRSP withdrawals until the end. For some investors this makes no sense. If some investors wait to convert their hearty RRSP accounts into Registered Retirement Income Funds (RRIFs), based on RRIF minimum withdrawal requirements, they’ll pay more tax.”
Based on this quote, another thing for Heather, you don’t need to convert your entire RRSP into a RRIF.
Good to hear from you Heather.
I cannot provide any direct investing advice for a few reasons on this site, but you can certainly convert a portion of your RRSP to a RRIF. There is no MAX limit to pull money out of the RRIF. Just remember you’re taxed on it.
My approach for my parents, if this helps, will be to encourage them to use up tax-inefficient (money in registered accounts) sooner than later and convert the registered money into tax-efficient sources of income: ideally using TFSA, but also the non-registered account and using dividends and capital gains.
These forms of income are taxed at about half the rate of interest-bearing investments, thereby controlling the overall amount of tax that is paid out to the government.
Heather, if you can generate most of your retirement income (and manage retirement expenses) with work pension and CPP, then using up tax-inefficient income sources seems to make sense. Again, if in doubt, talk with a financial professional who can understand all your investing and income goals.
Thanks for reading,
Mark
Great and clear points, Mark. One statement is not clear though – “If you convert hearty RRSP to RRIF you pay more taxes”. Why so? The tax rate is the same for both accounts. You pay the same amount of tax if your annual income is 35k derived from rrsp vs. 35k derived from rrif. In terms of taxation there is no difference as I see between these two accounts apart from 2K pension income claim from rrif.
Hey Victor, not necessarily.
Take for example an RRSP value at age 65 worth $300k vs. RRIF value grown at age 71 worth $350k. Due to higher value in RRIF, with forced withdrawals, coupled with other government benefits that may kick-in such as CPP and OAS, some folks (by delaying tapping their RRIF in year age 72 after converted from RRSP to RRIF at age 71) could pay much more in overall taxes – that was my point.
In terms of RRSP to RRIF at most ages, it could be a wash but there is also the opportunity for income splitting beynod $2k pension credit per person which are advantages for RRSP to RRIF at age 65. All said, delaying all assets in RRSP to RRIF conversion in the year you turn age 71 is usually not tax-smart for most.
Thoughts?
Mark
Thanks Allan, it seems I have been so focussed on tax savings I’ve lost sight of the bigger picture. Running the analysis, it definitely makes more sense to take the CPP and pay the higher taxes. Preserving my RRSP longer (by making smaller withdrawals) will increase the tax burden but ultimately provide more opportunity for growth over the 65-71 years. In addition, it would reduce my dependence on CPP which as Mark pointed out, may not be as guaranteed in the future as it is now.
This is very timely for me as I have also been doing the what-if analysis on RRSP withdrawals. My RRSP is currently $600,000 and I have stopped contributing about 5 years ago. My current plan is to withdraw $38,000 initially from my RRSP per year (always keeping under the amount set as the upper limit for minimum tax) between 65-71. This will cover my basic expenses and I will use my non-registered or TFSA to supplement my income as required. I do not plan on applying for CPP until 71 so the $38,000 will keep my tax rate at a minimum. In addition, with deferring CPP, I will be shifting some of my non-guaranteed income from stocks/bonds in my RRSP to guaranteed, inflation indexed CPP. Can I get your opinion
Hey June,
I don’t really have enough information to give advice, and I cannot do that anyhow, since I’m not a tax professional but this is my thinking on this issue:
Anytime you can minimize tax on RRSP withdrawals, keeping your marginal tax rate (MTR) low, is a good thing. Unfortunately CPP, pension income, interest income other “employment” income is taxed at the highest rate so keeping those income streams low in retirement is a good thing. Taxation from capital gains (first) and dividends (second) are tax-efficient forms of income, so it’s good to maximize/use tax-efficient forms income in retirement whenever possible.
By deferring CPP income, you are deferring an inefficient form of taxation. This seems to be a good thing.
Overall, although complicated I can appreciate, you have a good problem to have in retirement.
Hi Mark
We have been retired for four years now. I am fortunate enough to have comfortable pension to support both my wife and I . My wife does not have a pension and will start getting CPP this August. The income splitting provision provide us with an additional $6,000. dollars of money per year. Knowing that my wife didn’t have a pension I always maxed out my residual RRSP room into a spousal account as well as making substantial contributions to her RRSP’s. We always maxed out our TFSA and presently have 48,000 each because of investments. We had not been dipping into our RRSP money until I came to the realization that if I waited until 71 that most of our hard earned money would end up in government coffers. So three years ago I started cashing out the RRSP money to max out the TFSA’s . The goal here is to transfer as much as possible minimizing the tax liability to ensure when we are both receiving the the OAS that we remain below the threshold for claw back. It will be difficult be we are trying. The only other problem I have is to figure out what to do with the cash values in our life insurance policies as we only have whole life policies. It is a shame to leave all that money in there even though my heirs will benefit a little because of paid up additions,but they won’t recover it all.
About the cash value in your life insurance policy, you could use your policy as collateral for a loan, which would be tax free. The other methods, a direct withdrawal or policy loan, will both trigger taxes and may push you into a higher tax bracket.
That’s true Brian. I wonder if using your life insurance for other things than life insurance, (i.e., collateral) is good practice? This is like leverage on your mortgage debt to buy stocks and bonds. Thoughts?
I always personally worry about collateral and leverage since you’re now making yourself a bigger liability. It’s almost the opposite of what insurance and debt management is all about, transferring that risk away from you to someone else.
It’s similar in that loans are involved in both cases, but instead of investing, you’re using the loan to supplement your retirement. If you don’t want or need to leave a legacy, why not use up all the cash in the policy?
Of course, there are risks associated with using a life insurance policy with cash value as collateral for a loan.
For instance, if you decide to capitalize the interest, beware that the lender may demand repayment of the loan if it exceeds a certain percentage of cash value in the policy.
If this happens, then you’d likely have to surrender the policy and repay the loan, which will create a tax liability, defeating the purpose of the collateral loan. So while this is the most tax efficient manner of accessing policy cash value, it also has the most risk.
Congrats on the retirement Paul.
Pensions are a gift, I’m realizing this more and more as some friends of mine do not have one and they are working hard to save for their retirement.
The income splitting is smart for you guys. I recall my father started a spousal RRSP for some of the same reasons. My parents don’t have TFSAs yet, for a few reasons, but they will once I get them figuring our their RRSP situation.
We don’t have our TFSAs maxed out yet, but plan to in 2014:
https://www.myownadvisor.ca/2014/01/2014-financial-goals/
I believe your thinking is correct and many seniors need to take a hard look at their situation: waiting until 71 may give the government more money (back) in tax that if you start taking slow withdrawals before age 71. Why would people do that?!
Anytime you can stay below the thresholds for more taxation, that’s good money management and good on you Paul to know your options.
That’s something I’d like to learn and write more about, cash values, etc. of managing life insurance. I have a very small whole life policy thanks to my parents but not sure how to manage it long-term. I have a partnership on my site this year with LSM insurance and maybe they can help me with a post on that. Thanks for the idea.
Hey Mark,
Great post! Actually I’ve been thinking about doing exactly this, and was planning to start for 2014 or 2015…
What I was going to do was transfer assets in kind from the RRSP to the TFSA (if possible). My plan is to move $5500 in stock via the transfer assets in kind, and withdraw $550 for withholding taxes. Or if need be just cash out $6050 each year, pay the withholding tax, and contribute $5500 to the TFSA.
That will give me more tax-free income in retirement. Of course, the U.S. stocks will still need to be left in the RRSP.
I love this plan!
Cheers
Avrom
With regard to electively making withdrawals from RRSP(s):
This is actually quite easy to model in a spreadsheet including allowing for variable sized RRSP(s), other(e.g. pension) income affecting tax rates, all the different federal and provincial tax brackets, estimated rate of inflation, return on investment inside and outside the RRSP(s), possible loss of OAS Supplement as income rises and to model for a couple (e.g. taking advantage of income income splitting).
The output can be in the form of a graph with each line representing a different withdrawal strategy.
I have done this, it was an interesting exercise.
N.B. Do NOT focus on the taxes paid – in a perverse sort of way the more tax you pay the more successful you have been. Instead focus on the (accumulated) after-tax money you are left with under each withdrawal strategy, after all that’s what really matters.
Have fun!
Great idea!!
The only factor I find really complex is the outside investment returns and tax effects. Using one rate is not really a good idea. The mix of capital gains, vs dividends (eligible or not) vs interest, and foreign vs domestic, with exchange rates, can be really tricky and involved.
The strategy is also impacted by what you do with the withdrawn money. A scenario for just spending is ‘simple’. More complex if you tie it in with moving the withdrawals to a TFSA and then getting tax-free returns for the future.
My wife and I are calculating this in real time right now. We were fortunate enough to retire at 55 with defined benefit pensions. My calculating has led me to the strategy of withdrawing enough each year to fully fund an annual TFSA contribution for each of us. Ideally I want to maximize the TFSA’s and minimize or eliminate the RRSP’s before age 71 (and ideally before 66 so that CPP/OAS do not up our tax brackets).
Some of the worst advice I got from financial advisors years ago was to contribute to RRSP’s. Looking back, unless you have income in the very top tax bracket (and I did not) the strategy is highly suspect but the knee-jerk advice continues. Understanding tax deferral vs tax refund is the key, and those pushing RRSP’s do not explain it. Luckily I did some planning 10 years ago and ceased any RRSP contributions before the accounts got too big. Note too that with the pensions, my investments are almost all stock, very little bonds or GIC so the RRSP shelter is a non-issue.
Knowing what I know now, I would have invested in a regular account and used the capital gains exemption etc along the way. Then I would have actually owned ALL my savings outright — no government claim like the RRSP — making income planning and maybe ex-pat strategies much more viable.
Hey Mark2,
Thanks for writing – great comments.
Retiring at 55 with a DB pension is what most of my cohort dreams about. Hopefully another 15 years or so will be kind to me financially.
I like your strategy of withdrawing from the RRSP, enough to avoid major withholding taxes and fund the TFSA and max out contribution room, $5,500 for this year per person. If the federal government does what it says it will do when they balance the budget, this will open up a larger world of possibilities for retirees like yourself: you will have double the TFSA contribution limit ($11,000) per person.
Even during our working years, we want to maximize our TFSA and optimize our RRSP:
https://www.myownadvisor.ca/2012/02/why-we-optimize-do-not-maximize-our-rrsps/
I’ve read from a number of retirees, their plan is to eliminate their RRSP’s before age 65 since that’s when OAS takes effect, with CPP, if not CPP beforehand. I don’t see this is a bad move if you find out you might pay more tax in your 70s than 60s. I’m not sure why seniors would want to do that if they could avoid it.
RRSPs are great for very high income earners, good for other incomes but a poor choice for someone making <$50,000. $50k per year is good money but those folks are likely better to max out their TFSA and kill debt for starting an RRSP. Just my take. "Understanding tax deferral vs tax refund is the key, and those pushing RRSP’s do not explain it." Agreed. In fact, if you spend any part of the RRSP refund, you're better off saving money in another account. Good on you to do some planning years ago, most people have no friggin' clue. I have very little bonds as well. I figure bonds aren't going anywhere for years and I can get more yield from Coca-Cola stock. I would be interested to hear back from you and continue the discussion. Cheers, Mark
Thanks Mark. Too busy golfing to reply before now!
I agree on the bonds. I have dividend stocks for the most part also. It really helps that the pensions are really like a bond anyway.
I do have 4 chunks of money though in target-date bond funds that come due in the next few years. I did that to save US $ cash that i project needing in a five-year time horizon. These funds hold bonds to maturity, then wind up so there is little or no volatility or risk from rising rates, and they pay in the 4% range.
One big issue in the whole calculus is what do you want left at the “end”. My wife and I looked at people we know, and most have ceased active travelling and spending by 80 or the early 80’s. We also decided to spend our savings, not worry about leaving a big estate — the kids can be set up, but are then on their own!
Given those assumptions, we set out to spend the savings portion by age 80. I built an Excel model to account for tax, investment return, capital spending like vehicles, CPP, OAS etc and calculated a withdrawal to level out the spending in inflation-adjusted dollars until age 80. (Note — our pensions currently fund our living expenses plus wintering down south, currently Florida)
In that scenario, the best move was to eliminate the RRSP’s and get as much as possible into TFSA’s – hopefully so that between 65 and 70 all our invested capital was earning tax-free in the TFSA.
Note that we own a house, and have no debt so there is a safety cushion there that is not worked into my calculations. We could certainly downsize in future to free money for health care or unexpected situations.
Contrary to some advice, I also have most of our capital in US dollars — because I want to spend it on warm winters and travel — and that capital is in taxable accounts. I put some US $ in an RRSP before I thought through the tax hit — when the CAD falls against the US, I have a bigger tax hit in cashing out, but I never really want the money back in US dollars, so that was a mistake.
As to your parents, I have watched my parents get burned by having to take RRIF minimums for the past 10 years. They don’t spend elaborately, and have no need for the money so it feels to them like throwing money away. In fact, given their age and experiences, they just cannot spend the money!! TFSA’s and income splitting have really helped with sheltering the forced withdrawals in future and minimizing some taxes. They will also help with preserving capital for us kids, if health issues do not eat it up — luckily no issues so far!!
I cannot see the sense in an annuity if you have no clear need for the income stream. I think a withdrawal and smart investment strategy is likely to yield sufficient results. And then you need to look at getting it out of RRSP’s so that the heirs do not pay tax at full rates on that inheritance — and that can be a hard conversation to have with parents for inter-generational tax planning. In my parent’s case it should be done now while they are both alive and can income split to minimize the tax bill! What age to start that process is a whole other calculation and estimate!
The Stats Can chart for income in Canada shows that in 2011 only 3.4 million of 25.6 million taxpayers earned over $75 000 per year (http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/famil105a-eng.htm) so it is no wonder that we see articles in the press decrying that so few contribute to RRSP’s — looks to me like most are being rational!!
Wow, thanks for the great comment!
Had to go golfing? Must be nice! Only 3 months away for me from this cold Ottawa weather.
I like your thinking about a pension as a big bond:
https://www.myownadvisor.ca/2012/12/got-a-defined-benefit-pension-plan-consider-yourself-lucky-then-consider-it-a-big-bond/
I would think I’d be happy to have my health in my 80s. Probably not much travelling anymore, except for medication 🙂 “At the end”, we intend to give some monies to our nieces and nephews and charities we are passionate about; but we’re certainly not planning to leave a big estate.
If your pensions are currently floating your living expenses (in Florida) you are set, which means you can and should eliminate the RRSP’s sooner than later.
I suspect if we have our health and our able to travel lots in our retirement, I’ll keep investments in USD $$ in a taxable account for travel as well. Use the dividends to travel, keep the capital. Ideally and better still, I will have a fat USD $$ TFSA so I can spend money from that 🙂
Have you considered that? A U.S. $$ TFSA account?
As for my parents, I see no need for an annuity whatsoever. Get the money, slowly, out of their RRSPs, first – pay off any debts and then start funding the TFSA. At least then, while they will pay full tax on pension income, they will start building an account with tax-free investments for growth and withdrawals that will not reduce their OAS payments. Seems perfect to me.
Sounds like a good plan!
We always lived within our paycheques, got rid of debt, and basically saved a lot of money each year, especially close to retirement such that when we retired, we were really living on our retirement income. We just do not save any money anymore from our income!
In 1 TFSA I have all US $. I solved the withholding tax issue by buying a Canadian Bank stock on the NYSE in US $. I believe you could do this with other Canadian companies that issue stock in the US. I plan to move assets from the US$ investments to the TFSA’s over time. Probably eventually the TFSA’s will be all US$ investments. (Holding on to a CAD$ investment in the other for now but will eventually transition it to US$ too).
Here may be one other reason the get the $$ to the TFSA.
The one other thing I factor in is what is the future of OAS for everyone?
Paul Martin actually tried to do a common-sense revamp to the plan. To tie it all in to overall income support I believe. To me, it makes no fiscal sense as actually run.
Given the income chart I referenced in the earlier post, I would think that once an individual is making $50 000 plus (in the top 28% of all earners) the claw back should likely begin and I do not see much economic justification for a payment to those earning over $75 000 (top 13% of all earners).
Maybe the claw-back starts at top 25% and is fully in before the top 10%? (and yes that would hit me hard!)
I realize politics may keep anyone from reforming the waste.
Paying well-off seniors the money versus spending on improving jobs, training, income-support etc for those who we expect to work and pay to maintain CPP and health-care from their taxes seems like an easy choice — fund the future not the past.
@Mark2,
Nice call, re: buying a Canadian Bank stock on the NYSE in US $. I believe you could do this with other Canadian companies that issue stock in the US – and yes you can.
I’m probably going to use a USD $$ TFSA in the future.
I’m very much against how we run the OAS right now:
https://www.myownadvisor.ca/2013/11/time-overhaul-old-age-security-oas-101/
I do not believe a senior making over $80,000 per year should be considered old age “security”.
I would suggest something around the $70k income mark is subject to 100% OAS clawbacks and the 100% clawback could be indexed to inflation.
Paying well-off seniors the money versus spending on improving jobs, training is nuts. But this is where our government is, sadly. 🙁
Thanks for your great comment!
Hi:
I find this a vexing problem too. I retired at 39, now 51 with $1M portfolio non registered generating about $32K dividends annually, most DTC eligible. RRSP is about $250K. Non registered capital gains sitting at about $300K. My wife is a teacher with nice pension coming.
So every year I need to take income beyond my dividends to sop up the DTC. The question is always how much and from where. I used to aim to pay $1-2K tax annually, but I now realize that was wrong as this will just bite me in 2 decades. So 2013 tax year I took 27K from RRSP. This gave me a top line income of about $53K, total tax of about $5K. So my average tax is about 10%, MTR is about 32%, MTR average on the 27K is about 19%. Even at $5K tax annually this is probably still going to give me a tax issue 20 years into the future and I should probably be taking even more income now likely up to the transition to the next tax bracket.
It isn’t clear to me whether RRSP or capital gain is the way to go. My thinking now subject to revision is to draw down the RRSP, but leave enough to provide a source of income for the pension credit. Then at some point I have the capacity to leave the shares to charity and incur zero tax on the capital gains. But this is projecting tax laws 20-40 years into the future. This strategy might see the cancellation of the 50% inclusion rate and bite me in the behind. Or the charitable donation rule might be repealed. There really is no way to calculate any of this and it just reduces to sticking a finger into the air to see which way the wind is blowing.
Any insight from anyone appreciated.
Cheers
Boulter,
Thanks for your great comment. Retired at 39, geez.
Your path reads like what I want to do; retire with $1M portfolio non-registered to generate > $30k in dividend income taxed at a low rate.
https://www.myownadvisor.ca/dividends/
I can’t provide any advice since I’m not a financial professional but have you considered drawing down the RRSP, say >$5,000 per year, paying the withholding taxes and moving all funds to TFSA? When TFSAs are maxed out, you can build up non-registered assets and keep the DTC in check.
I suspect if you keep the RRSP in tact until your 70s, you’re going to have some major tax headaches.
If you can keep within the same MTR and not move to the next tax bracket; and draw down the RRSP now, seems like a good idea to me.
Capital gains are always the lesser of tax evils. Income and interest is always taxed at the highest rate; so do what you need to do to avoid taxation on income and interest.
Projecting tax laws in 20-40 years into the future is a pretty wild guess for sure, I have no clue but at least you can change your tax situation today.
Thoughts?
Mark
Great post Mark. Many years ago when my spouse was between jobs, she was able to transfer some money from her RRSP into her TFSA. This strategy worked out well, because any transfers now would incur a huge tax hit.
Thanks Kanwal. Sounds like the smart thing to do, there would be a small tax hit but certainly not a big one.
This is the exactly the strategy I’ve been helping my mother with ever since the TFSA was introduced. My mother is a widow with a partial defined benefit pension (from my father) as well as OAS and CPP. She doesn’t qualify for GIS and she has a significant RRSP invested in GICs and bank mutual funds. Starting when the TFSA came into effect, we’ve had her financial advisor pull $5000 per year from her RRSP and invest it within a TFSA in a low-cost value bank mutual fund (it would have been too great a leap to start a brokerage account for her at this point). With this conservative investing, she now has a value over $36,000 in her TFSA and we will continue this going forward, although at the end of 2013 she had to convert the RRSP to a RRIF, so we’ll likely also start some non-registered investing with whatever surplus income she receives via the RRIF. RRIF withdrawals (other than for the TFSA contribution) will be deferred until the end of the year to continue maximizing sheltered growth.
With a significant RRSP, I think this is a good idea:
-move $5,000 per year from RRSP, pay withholding taxes and invest it within a TFSA if you have no debt.
-invest in products inside the TFSA that are a) low-cost for sure and b) income-generating.
Great work getting the TFSA over $36,000. If you need to take more money out of the RRSP, yes, go non-registered maybe with a broad-market tax-efficient, low-cost ETF like iShares XIU or a dividend ETF like VDY. Absolutely, hold off on withdraws as long as you can to maximize the sheltered growth.
Sounds like you know exactly what this is all about!
My parents both have state pensions and real estate that feeds their retirement although they hardly use it. We don’t have RRSP’s in the UK obviously so when I moved to Canada I was far behind for my age, so lots of catching up to do. I think it’s important to do your research before just pulling your RRSP’s and to be honest I get fans email me asking about pulling them early to pay off debt. I also have people wanting to know what to do in the event of a divorce because investments are big business. Thanks for an informative post Mark. Cheers CBB
Sounds like your parents are in great shape Mr. CBB.
I agree, you shouldn’t just pull out the money from RRSP without a plan or doing the math. For some folks, leaving the money there and rolling assets in the plan over to a RRIF might be the best plan.
The problem for people who receive a UK state pension is that for those living in Canada (Australia and some other countries) the pension does not receive inflation increases. Several organizations in these countries are trying to get the UK government to change this policy. This is the Canadian group: http://www.britishpensions.com/
I learned from this group that if you go to certain countries for a vacation, including the UK of course, with a quick phone call you can get your pension increased for the duration of your stay! I also learned that I can buy back years I’ve not paid into the National Insurance program (like the Canada Pension Plan). I haven’t yet done the calculations to see if it would make for a good investment.
“I learned from this group that if you go to certain countries for a vacation, including the UK of course, with a quick phone call you can get your pension increased for the duration of your stay!”
Really? Odd. So you can’t increase it until you call them for it?
It is indeed odd. Someone receiving a UK state pension while residing in Australia, Canada, South Africa or New Zealand will not see any increases in their UK pension payments.
If they live in the UK (of course), USA, Germany, Italy, Barbados, Bermuda, Israel, Jamaica, Mauritius, the Philippines, and many others, they will receive increases!!!
If the retiree is on vacation in any of the countries where the pension does increase, then they can ask for their pension to be increased for the duration.
I understand that some not so well-off retirees would like to leave the UK to live in their country of origin, but instead remain because their pension will never increase.
Seems odd Bob. Do you have any sources for your information? Thanks for the comment.
Mark asked “Do you have any sources for your information?”
For an overview of the problem see the links to news stories on the page: http://www.britishpensions.com/
Here’s where you can see that the UK pension is frozen if you live in Canada: https://www.gov.uk/state-pension-if-you-retire-abroad/rates-of-state-pension
About the temporary increase, search on “visited England my pension would increase” on this page: http://www.britishpensions.com/can-i-increase-my-pension-amount/
Thanks for sharing Bob. Good information.
Hi Mark,
Just wondering if you’ve heard of the RRIF meltdown? It’s a high risk strategy to withdraw from your RRIF/RRSP “tax-free”, so your parents probably won’t use it, but it’s still an option to keep in mind.
I have Brian. I might write about that strategy at some point. I don’t think that’s for my parents as you say.
My parents will definitely start pulling from their RRSPs well before 71. Both of my parents are lucky to have a pension and retirement savings but they plan to retire around 55 and that may be a bit of a strain on their finances.
Pensions are a gift for many workers, you’re lucky to have one. If they can retire at 55, that’s certainly ahead of most. I think most of my cohort will be lucky to retire at 55, maybe 60 will be considered “early retirement” another 20 years from now.
Hi Mark, retirement is still a ways off for us but we do have somewhat of a plan. Our goal is to make reasonable contributions to both our RRSP and TFSA and then slowly draw down the RRSP upon retirement. As you mentioned we’d like to keep some in the RRSP to convert to a RRIF for the credit. I’ve noticed that the minimum withdrawal percentages increase quite a bit over time though so eventually it will all be taxed
Hey Dan,
We sound the same: make reasonable contributions to both RRSPs and TFSAs and draw down the RRSP in another 20 years. Keeping some money for the tax credit is smart, if you don’t have a pension since I recall pensions can be used for that tax credit as well.
Here is a great table about RRIF minimum withdrawals:
http://www.tdcanadatrust.com/products-services/investing/retirement-income-options/withdrawal-cht.jsp
Your age — or your spouse’s
(the choice is yours)1 Annual minimum in %:
55 2.86
56 2.94
57 3.03
58 3.13
59 3.23
60 3.33
61 3.45
62 3.57
63 3.70
64 3.85
65 4.00
66 4.17
67 4.35
68 4.55
69 4.76
70 5.00
71 7.38
72 7.48
73 7.59
74 7.71
75 7.85
76 7.99
77 8.15
78 8.33
79 8.53
80 8.75
81 8.99
82 9.27
83 9.58
84 9.93
85 10.33
86 10.79
87 11.33
88 11.96
89 12.71
90 13.62
91 14.73
92 16.12
93 17.92
94+ 20.00
Hey Mark
I’ve never posted on a financial type website until yesterday on yours and now this is my 5th post on your site. (I guess I do really like your website and articles)
I’m almost 61 and just retired 7 months ago without any company pension. My wife was a stay at home Mom so I put more dough into her spousal RRSP than mine as I have a larger non-registered account and am already collecting CPP (her CPP will be really tiny). She is 4 years younger than me so this factored into it as well. I also made a loan to her last Sept to get her non-registered account kick started.
After some serious calculating, I decided to withdraw $30k per year from her RRSP and $3k per year from mine starting this year. We’ll use this money for some of our expenses and put some in our TFSAs to max them out each year. I came up with these figures in order to keep both of our net incomes around $42k per year to remain in the lower tax bracket.
The only other thing I have planned is to convert $20k of my RRSP to a RRIF at age 65 so that I can withdraw $2k per year and get the $2k pension tax credit. We’ll both wait until 71 to convert the rest.
Lastly, I am a DIY so came up with this strategy but doing some reading and giving Excel a workout.
Ciao
Keep the comments coming Don. I try and respond to every single one….
Yes, like my comment to Gary, some math is important on this one. Many options to consider. A great option, especially if you have a large RRSP, is to withdraw some money and get that TFSA maxed out. A retired couple can have $62k contributed to their TFSAs now. This contribution earning a modest 4% yield makes the couple about $2,500 tax-free or $200 per month and that money withdrawn does not affect OAS.
Next year, you can contribute the $2,500 withdrawn and even more than that with the increased TFSA contribution room; so you essentially have converted taxable income to totally tax-free income. 🙂
Smart to keep some RRSP for a RRIF to ensure you can take advantage of the $2k pension tax credit. There are other sources for the pension credit I recall:
If/when 65 or older in the year, pension income for the tax credit includes:
-Income from a pension fund
-Annuity income out of a RRSP
-Income from a Registered Retirement Income Fund (RRIF)
-Interest from a prescribed non-registered annuity
Smart stuff.
At some point, I will likely suggest my parents transfer at least $12,000-$15,000 to a RRIF so they can take $2000 out per year after age 65 essentially tax-free.
As a Tax Professional I recommend withdrawing $4000 from the RRIF starting at 65 as you can do the pension income splitting when you are 65 even if your spouse is under 65.
Thanks AnniM for the comment, good information to know.
I recall pension income splitting can occur outside a RRIF as well: with spousal RRSP and of course, pensions. Per couple, pensioners can get $4000 out of the pension without tax.
I also recall you can’t split Canada Pension Plan (CPP) and Old Age Security (OAS) for the pension splitting tax credit.
I don’t think this is true. My understanding is that I can transfer the $2k credit to my wife but we both can’t use a full $2k each.
Are you positive on this?
Wow Mark; you have hit home with us. We retired 7 plus years ago and it has been a complex set of decisions on how to withdraw our RRSP’s. This year we converted to RIF’s as we want to be able to income split as needed. We have no company pensions as I was self employed. We both collect CPP and OAS (65 &67) so we have to be very careful and budget our income. We have no debts and our house and vehicle are paid for. I wish you luck with your parents because you will need it. I wish we had had TFSA’s during our working years — they are a MUST for everyone saving for retirement.
Hey Gary,
Yes, these decisions are not straightforward for sure. Doing the math helps but also where things are at financially, whether you have debt in retirement, enough fixed income (pension for living expenses), whether your RRSP is large or small, etc.
I think ultimately it comes down to saving on taxes where you can. Having a tax problem in retirement is a great problem to have because it means you’ve saved plenty but like I said in a previous comment, to pay taxes unnecessarily is wasteful.
TFSAs are a gift aren’t they? We hope to max ours out for years to come and they are a MUST for everyone saving for retirement.
This is a very timely article. When you’re in the accumulation phase any tax deferral/avoidance strategy appears to be attractive. ‘Pay less taxes?!’ – where do I sign up! But after a certain point of expected financial stability it pays to start looking at how to maximize for the longer term.
So now being in my early 50s with at least partial retirement on the near term horizon I’m starting to wrestle with how to maximize the leveraged phase of our assets.
Things to consider are:
How long will spouses work
Do you continue to contribute to RRSPs (at a certain point you’ve built up enough base. For example if a couple amassed a $500k RRSP base by age 50 it could conceivably be worth $2M if you don’t touch it when you need to covert to a RRIF at age 71).
What mix of income producing assets vs growth assets vs pensions do you have?
Should a non working (for money) spouse cash out their RRSP long before the money is needed and use taxable and TFSAs accounts?
And the big kicker – how will tax laws change over the 40 years or so that you have to plan for?
A complex topic, but thanks for bringing it back to the forefront.
Hey gmf,
Thanks for your detailed comment.
I wanted to write this post because I suspect some people blindly use the RRSP and might not know what they are getting into, or their options down the road. In my parents case, it may make some sense to make slow withdrawals from their RRSP, say <$5,000 each year, and move that money into a self-directed TFSA before they are forced to collapse the account. I wouldn't say this solution is for everyone. People with a small RRSP and no pension, might be better served keeping the RRSP intact until the very end since their fixed income is limited and RRIF withdrawals will not push them into a new tax bracket. Federal tax brackets for 2013: $43,561 or less = 15% $43,562 – $87,123 = $6,534 + 22% on next $43,562 $87,124 – $135,054 = $16,118 + 26% on next $47,931* Although paying lots of taxes is a good problem to have in retirement I'm not convinced you should do it unnecessarily.