Decumulation

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  By Guest Blogger Sinan Terzioglu
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When it comes time to start withdrawing from an investment portfolio to fund retirement (as well as significant life events such as the purchase of a home) it often makes the most sense to begin with non-registered and tax-free savings accounts before withdrawing from registered savings plans like RRSPs. This defers the taxes that would result from RRSP withdrawals for as long as possible. A RRSP must be converted to a registered retirement income fund (RRIF) at the end of the year an account holder turns 71 and annual minimum withdrawals of approximately 5% must begin the following year, however, there are some circumstances when it makes sense to withdraw from RRSPs sooner so that you pay less tax over time.

Pension Income Tax Credit

Retirees 65 or older not requiring withdrawals from their RRSPs to fund retirement and without a defined benefit pension should consider converting some of their RRSP to a RRIF because the first $2,000 withdrawn annually from a RRIF is eligible for a pension income federal tax credit of 15%. Withdrawals from RRSPs are not eligible for the tax credit so to qualify you must open and withdraw from a RRIF. Since you do not have to convert an entire RRSP to a RRIF in order to qualify for the tax credit you can take advantage by transferring up to $2,000 per year to a RRIF starting at the age of 65 until your entire RRSP must be converted to a RRIF at the end of the year you turn 71. Old Age Security (OAS) and Canada Pension Plan (CPP) benefits are not eligible for the federal tax credit.

Higher Taxable Income & Capital Gains Expected

Retirees in their 50s and 60s expecting to have higher taxable income in the future because of defined benefit pensions and/or planned dispositions over time that will result in capital gains in non-registered accounts should consider early periodic withdrawals from RRSPs so that they are taxed at lower rates in the years their income is low. If an entire RRSP is converted to a RRIF the assets cannot be transferred back to a RRSP and you would be required to withdraw the annual minimum from that point forward so for maximum flexibility when planning period withdrawals from a RRSP, it would be best to not convert to a RRIF because RRSP withdrawals can be skipped in higher-income years.

Spousal RRSP

Contributing to a spousal RRSP is a retirement savings strategy married or common-law couples can use to even-out RRSP savings so that when it comes time to retire each spouse can withdraw a similar amount of money from their RRSPs and pay less total tax. The strategy is most beneficial for couples that are in different tax brackets because the higher income earning spouse can contribute to a spousal RRSP set up in the lower income spouses name and the contributions would count towards the higher income earning spouses deduction limit. After three years have passed the spousal RRSP account holder can withdraw funds and the withdrawal would be taxed at their lower tax rate but it’s important to be aware of attribution rules because they are in place to prevent the short-term use of spousal RRSPs for income-splitting purposes.

If withdrawals from a spousal RRSP are timed incorrectly they will be attributable to the contributing spouse and taxed at his/her higher rate. For example, if your spouse plans to retire in 2025 while you continue to work and you contribute $5,000 to his/her spousal RRSP in each of 2023, 2024 and 2025 and then your spouse withdraws $20,000 in 2025 than $15,000 would be attributed back to you and only $5,000 would be taxed in your spouse’s hands. In this example, in order to have no amount of the withdrawal attributed back to you your spouse would need to wait until January 1, 2028 to withdraw funds from his/her spousal RRSP.

First Home Savings Account (FHSA)

The FHSA will become available sometime in 2023 for any Canadian resident that is at least 18 years old and has not owned a principal residence in the previous four calendar years. Those that are eligible will be able to contribute up to $8,000 annually (tax deductible) up to a maximum of $40,000 over 5 years. Funds can grow tax free and remain in the account for up to 15 years at which point they can be withdrawn tax free to purchase a principal residence otherwise they will be taxed as income, however, taxes can be deferred by transferring the assets in the FHSA to a RRSP even if you do not have available RRSP contribution room. Another advantage of the FHSA is that up to $8,000 per year can be transferred on a tax-free basis from a RRSP to a FHSA and the funds can be withdrawn tax free so long as they are used to purchase a principal residence. For those that do not anticipate being able to contribute to a FHSA in the next few years and would like to purchase a principal residence sometime in the future opening a FHSA and transferring some RRSP assets to it is a great way to save for a down payment while paying no tax on that portion of funds.

Develop a Plan

When preparing for retirement and planning for major life events like purchasing a home it’s important to continually consider ways to best utilize your RRSP because it may help you not only pay less tax over time but also potentially allow you to maximize government benefits such as OAS which begins to get clawed back when income exceeds $81,761 in 2022. Early RRSP withdrawals may also make sense for those that will have defined benefit pensions especially if they have available TFSA contribution room because pension income is fully taxable and the income generated in a TFSA will help maximize after-tax income. While death and taxes are a certainty we at least have the ability to plan our RRSP withdrawals over time and pay less tax.

Sinan Terzioglu, CFA, CIM, is a financial advisor with Turner Investments, Private Client Group, Raymond James Ltd.  He served as vice-president of RBC Capital markets in New York City and VP with Credit Suisse in Toronto.

 

59 comments ↓

#1 crowdedelevatorfartz on 11.11.22 at 12:59 pm

I didnt realize the feds were going through with the FHSA.
Sounds like a “home buyers TFSA”.
Either way.
I’m in.
Sorry Ponzie.
Current home owners need not apply. :)

#2 Tony on 11.11.22 at 1:14 pm

I plan on putting a lot of money into something that will hopefully make a capital gain while producing no income to try to avoid the OAS clawback at age 65. At age 71 I haven’t come up with a strategy yet to avoid a total clawback.

#3 the Jaguar on 11.11.22 at 1:47 pm

Thank you Sinan. I read an article some time ago about this strategy. One of the people who used this strategy ( an accountant ) stated he withdrew some funds to pay back personal expenses on his line of credit in the year before he was required to flip to a RRIF. He said this:

“I’m already in one of the middle tax brackets, so my plan was to take just enough out so that I don’t go into a higher tax bracket. The general philosophy behind this strategy of using RRSP money to pay back personal expenses is ” I’m not going to live forever, and I can’t take it with me, so I am going to spend some money”.

Even without the ‘paying personal debt’ component I thought it was an interesting comment. While protecting the nest egg and growth remain important objectives, nobody really knows how long they will live or what activity level they will be able to enjoy in later years. I suppose it depends on one’s philosophy on estate planning as well.

The actor Daniel Craig ( Mr. Bond) was quoted as saying ” I don’t want to leave great sums to the next generation. I think inheritance is quite distasteful. My philosophy is get rid of it or give it away before you go.”

#4 TurnerNation on 11.11.22 at 1:58 pm

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———–
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—–
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I mean why print new currency if you plan on replacing it by Digital means??

#5 IHCTD9 on 11.11.22 at 2:05 pm

Excellent write-up, easy to understand, right to the point(s). I’m just beginning to think about formulating a plot for retirement. It’s almost certain that the B+D won’t be required for living off of – we have a super low cost of living. But, we’ll probably be RRSP heavy since we were stupid and did not jump on the TFSA option the minute it came out.

Right now I’m thinking a long slow bleed of the RRSP’s is in order, while redirecting/continuing to fill the TFSA’s for a clean hand-off down the road.

#6 preggoOptimizer on 11.11.22 at 2:10 pm

If i make 350k/yr, and my spouse makes 117k/yr. She’s due in march — can i juice her RRSP to 49k, collect a refund, and then withdraw the funds later in the year and pay withdrawal income when she is on Mat Leave making $0?

Is this tax optimal or dumb

#7 chalkie on 11.11.22 at 2:23 pm

Inflation came in at 7.7% in October’s inflation report, below economists’ expectations of 7.9 % inflation.

Prices will continue to go down “materially” into 2023, which justifies the recent boost in the stock market. Anyone wanting to unload a home next year, will feel the pinch that will feel like a bite, there is no soft landing in the cards for a few years.

Owning Multiple homes to allow the rent to pay for them, will be few and far between with any successes this time around.

Even paying in cash for a home right now, puts you in the Red, just due to your gains that you can get in the market with no headaches and you get to sleep like a baby at night.

Higher mortgage rates are tanking demand, as more buyers find themselves unable to afford today’s still-elevated home prices.

As a result, prices are now slipping more than would be expected during the normal “cooling off” period that occurs every fall.

The spring of 2023 there will be no accelerated home sales, but rather a short burst and then tank again right into 2024. Spring prices will be well below today’s prices.

When working with a financial advisor, pick a well experienced advisor, there will be plenty that will claim fame within the next 6 to 12 months, but the markers are coming back without any advice, just leave things where they are.

Think long term when investing, there are not many genies in the bottle for short term investing, it’s more of a casino approach, stay away from that mind set.

Home sales are way down and inventory is starting to mount, deals, deals and more home deals will be there for the pickings, do nothing now in terms of buying, stay calm, do not regret tomorrow’s prices, just to close a deal today.

Quote of the day: If you can get paid for doing what you love, every paycheck is a bonus

#8 Luckych on 11.11.22 at 2:28 pm

Question: Can one open 4 different spousal RRSP accounts and rotate contributions between them, to ovoid income attribution back to the contributor, should one want full flexibility in withdrawing money from a spousal RRSP any time?

No. – Garth

#9 Shawn on 11.11.22 at 2:37 pm

Spousal RRSP

“Spousal RRSP

Contributing to a spousal RRSP is a retirement savings strategy married or common-law couples can use to even-out RRSP savings so that when it comes time to retire each spouse can withdraw a similar amount of money from their RRSPs and pay less total tax.”

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The Spousal RRSP is absolutely golden in those cases where one spouse has very little income and the other has a relatively high income and can afford RRSP contributions (and has the room meaning, they don’t have a DB style pension or even a highly attractive DC pension with employer matching.

So only a small percent of couples would fall into category, but if you do the opportunity is golden.

A doctor or high-earning trades person or any high earner without a pension can make RRSP deductions at high marginal tax rates and the spouse can ultimately withdraw at very low tax rates.

We’ve gone through this math before and when the marginal tax rate at withdrawal is less than at the time of RRSP deduction, this beats the Tax Free Savings Account and that means it is actually negative income tax! You can choose to believe that or not but the math is the math. Any tax paid in this scenario will be more than covered by the initial RRSP deduction that should be thought of as partly funding the RRSP and the growth on that share of the RRSP. Talk about taking free government money when it is handed out, this is an example.

Bottom line. If there will a lower income spouse in retirement and if you can possibly afford it you would be a fool not to use the spousal RRSP. Well, unless you see divorce in the future, then I’m not sure.

For those that have done this for years and have that lower income spouse. Congratulations!

#10 Dr V on 11.11.22 at 2:41 pm

Good write-up Sinan.

From studying the various marginal tax rates and available credits, it looks like maximum CPP and OAS at age 65 adds up to little or no tax owing when you apply
the age credit. Add the RRIF credit and it totals close to $25k tax-free.

If you fall below the max CPP, you should be able to top
it up with RRSP/RRIF withdrawals so that in the end they are not taxed. either.

Although you could use unregistered dividends or cap gains as well, those sources enjoy preferred tax rates at higher income levels, so best to use the RRSP which would be taxed fully at those levels.

#11 Wrk.dover on 11.11.22 at 2:49 pm

#5 IHCTD9, please do tell, what is a pound of dead dozer worth in your locale? Didn’t get parted out I assume by your comment on being melted into cars.

#12 Shawn on 11.11.22 at 2:50 pm

DO NOT Withdraw RRSP funds until Retirement

Those talking about using a spousal plan and withdrawing after three years without attribution just don’t get.

Treat RRSP money as untouchable until at least retirement. Never mind this business of taking any out whether spousal or your own in a low income year. Instead don’t have a very low income year. And if you do, (say disability) find a way to not dip into RRSP.

The magic of tax-free compounding can’t work if you cut it off at the knees.

The goal is not to minimise taxes. It is firstly to have enough (or way more than enough) money in retirement and secondly to maximise after-tax income /wealth over a lifetime.

Yeah if you both die young there is a big tax bill. So what? You will be dead. This is not money for inheritance of kids. You need to plan on having money in case you live a long time.

Even with fat pensions this talk of tax bombs in nonsense. 50 cents after tax on a dolalr of RRSP withdrawals at age 85 is a heck of a lot more than if there is no dollar to withdraw. Early RRSP withdrawals to save tax at a young age will turn out to be “penny wise and pound foolish”. Let the tax free compounding do it’s work: 50% of $4000 is more than 100% of $1000. You get the $4000 monthly RRSP withdrawal by letting compounding work.

#13 ElGatoNeroYVR on 11.11.22 at 2:52 pm

This will work for some ,good write-up overall.
At the opposite spectrum is the “RRSP meltdown strategy ” which basically calls for the opposite , convert to RRIF and draw that one first before or in combination to a smaller portion of non-reg and don’t touch the TFSA unless you really must. A bit more tax for you but a lot less for the heirs and you would have theTFSA as an emergency fund for medical , late life care a.s.o ( buying a Lambo is not it ).
Mentioned as an alternative , as usual individual circumstances and life goals apply ,always get a good paid financial adviser to do the math and forecast for you.

#14 Elon Fanboy on 11.11.22 at 3:18 pm

18 S McBeath “ Highly recommend the book ‘Vimy’ by Pierre Berton – should be required reading in high school”

Thanks, ordered this for Xmas.

My Great Grand Uncle’s name is on Vimy. I intend to visit next year.

#15 Penny Henny on 11.11.22 at 3:27 pm

If an entire RRSP is converted to a RRIF the assets cannot be transferred back to a RRSP and you would be required to withdraw the annual minimum from that point forward so for maximum flexibility when planning period withdrawals from a RRSP, it would be best to not convert to a RRIF because RRSP withdrawals can be skipped in higher-income years.-Sinan
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You mention that one would be required to withdraw the annual minimum, but that only applies to someone 71 or older, correct?
If I covert my RRSP to RRIF at 60 there are no minimums. Is there?

#16 Søren Angst on 11.11.22 at 3:46 pm

Dr. Financial/Tax Management Death advising what to do just before death and a decade or two before death.

I don’t know how you do it Sinan but glad that you do.

Did not know about …

“the first $2,000 withdrawn annually from a RRIF is eligible for a pension income federal tax credit of 15%. ”

Years ago I just said screw the RRSP, withdraw, pay tax and stick it in a TFSA and Cash account with Mr. Market ETFs that bear high dividends.

Start spending that money with the precious time I have left on this Planet.

I didn’t want Gov dictating to me how much I could withdraw per year upon conversion to a RRIF.

Yes, not tax efficient just Dolce Vita efficient.

#17 IHCTD9 on 11.11.22 at 3:47 pm

#11 Wrk.dover on 11.11.22 at 2:49 pm
#5 IHCTD9, please do tell, what is a pound of dead dozer worth in your locale? Didn’t get parted out I assume by your comment on being melted into cars.
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200.00 buckaroos per ton picked up. A little more if you deliver. I already tried twice to part out with no takers, so it’s going complete as a running machine. No one wants a 10 ton dozer. Too heavy for homeowners, too small for farmers.

#18 the Jaguar on 11.11.22 at 3:58 pm

@#13 ElGatoNeroYVR on 11.11.22 at 2:52 pm
I thought the “RRSP meltdown strategy involved investment loans where interest write off offset some of the tax implications of the withdrawals…..
But if you hate debt it’s not very appealing, never mind the volatility.

What say ye, Sinan?

Isn’t there also some blog reader out there that can enlighten us on how few peeps actually live beyond 80? Wickedness is a good measurement, of course.

#19 ogdoad on 11.11.22 at 3:59 pm

No mention of those who chose to retire in their 40’s…

That’s ok, I don’t mind…I’m good…I’ll just…hug myself today, I guess…

Ha! C’mon, I’ll getta couple before the night is through.

Count on it!

Og

#20 Luckych on 11.11.22 at 4:08 pm

Thank you Garth for the previous answer. Much appreciated!

A follow up question: If one after contributing for 5 years then stops contributing to a spousal RRSP plan for 3 years, but then will resume contributions again. Will that result in all previous contributions to be ‘settled’, and only recent ones being a subject of a 3-year attribution rule back to the contributor?

Thanks in advance for sharing these insights!

#21 Wrk.dover on 11.11.22 at 4:15 pm

#12 Shawn on 11.11.22 at 2:50 pm
DO NOT Withdraw RRSP funds until Retirement
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At the end of my wife’s career, she spousal’d money at me to keep her below the next tax bracket.

After her retirement, before Harpers pension splitting, we repatrioted some out each year, at my no tax bracket, just lowering my dependent write off for her, but keeping her in the bottom bracket.

Now with pension splitting, the rest got stranded in there, growing.

My theory was tax creep would render tax paid then not now, astute.

Wrk.dover again though.

Same deal with my chump size early CPP, might as well have waited for more, we didn’t/don’t need it for living on.

#22 Tom on 11.11.22 at 4:18 pm

DO withdraw from your RRSP early and let your TFSA and non-registered investments grow. This will minimize taxes. That said, avoid withdrawing RRSP during the during the ages that you could game the system and earn OAS/GIS.

#23 Yorkville Renter on 11.11.22 at 4:23 pm

If I put in $8000 on the first day of the FHSA, and I end up buying a house – do I HAVE TO use the $8000 or can I just let it sit and grow tax-free for 15 and then move it to an RRSP?

Also, #6, I think the money needs to be in the spousal plan for at least 3 years for it to be pulled out

** disclaimer ** not an accountant

#24 Tom on 11.11.22 at 4:23 pm

If I purchased precon in 2019 and take ownership in late 2023/early 2024 can I open a FHBTFSA and take advantage of the first year? Can I then transfer to an RSP in 2024/2025?

#25 Sinan Terzioglu on 11.11.22 at 4:32 pm

#6 preggoOptimizer – Given your high income if you have available RRSP contribution room I recommend you maximize it by contributing to your wifes spousal RRSP, however, if you withdraw the funds while she is on maternity leave later in the year the withdrawal will be attributable to you so there would be no tax advantage to this. If you wait three calendar years after contributing to your wifes spousal RRSP and your wife withdraws the funds then the withdrawal would be attributable to her – Sinan

#26 Josh in Calgary on 11.11.22 at 4:36 pm

#6 preggoOptimizer on 11.11.22 at 2:10 pm

First of all, you’re too late because you have to leave it in for 3 years before you can take it out and have the withdrawal attributed to your spouse. Unless of course your spouse is planning on staying home and raising the kids for many years.

Second of all, it’s first in first out. In other words if you’re planning on doing it more than one year then you have to wait 3 years after the last contribution.

Third, you have to really watch the Child Tax credit thing. The fact that they start to claw this back after your spouse making any significant income (withdrawals go into income). This tends to negate any tax savings to a large degree.

We did what you’re proposing twice. Once it worked great. The second time not so much because we lost out on the child tax credit. Much better to just leave it in at that point.

#27 Shawn on 11.11.22 at 4:39 pm

If anyone mentions RRSP Meltdown, especially an advisor:

RUN, or at least ignore. Smile and nod because most people are set in their thinking but then just ignore.

If you don’t have money for TFSA, cut back on spending or work harder. Do not touch your RRSP before retirement.

And as far as getting GIS? Really? That’s your goal?

#28 Sinan Terzioglu on 11.11.22 at 4:39 pm

#15 Penny Henny – You can convert your RRSP to a RRIF as early as age 55. If you convert your entire RRSP to a RRIF at any age from 55 until required at the end of the year you turn 71 there will be annual minimum withdrawals required – Sinan

#29 Josh in Calgary on 11.11.22 at 4:43 pm

#12 Shawn on 11.11.22 at 2:50 pm
DO NOT Withdraw RRSP funds until Retirement

Those talking about using a spousal plan and withdrawing after three years without attribution just don’t get.

The magic of tax-free compounding can’t work if you cut it off at the knees.
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I’d say you’re wrong on this. Any time you can take money from the RRSP at a low tax rate you go ahead and do it.

The money doesn’t compound “tax free” in an RRSP. It compounds tax deferred. You will pay tax on it when you withdraw it. Actually, it’s worse than that, you pay tax as income instead of capital gains or dividends (half the tax rate).

If you have any room at all in your TFSA you take that money from the RRSP at a low tax rate and dump it straight into the TFSA where it will actually grow tax free.

Or you use it to retire debt.

It really depends on your use of proceeds.

#30 Ambi and Vasu on 11.11.22 at 4:44 pm

Thank you Sinan,

I am 66 and started the process of part converting my RRSP to RRIP today itself.

Thanks again,
Vasu and Ambi

#31 Sinan Terzioglu on 11.11.22 at 4:59 pm

#12 Shawn – Tax deferred compounding in registered accounts like RRSPs is certainly very powerful. If you do not require the funds in the RRSP and you anticipate your tax rate will stay the same over time then you should continue deferring taxes as long as possible. However, if you do require funds from your portfolio and have the ability to pay less tax now then strategic early RRSP withdrawals will allow other assets in non-registered accounts and TFSAs to continue compounding. Every circumstance is different so its important to keep all strategies in mind – Sinan

#32 Sinan Terzioglu on 11.11.22 at 5:01 pm

#12 Shawn – Every circumstance is different so it’s important to consider all strategies. Tax deferred compounding in registered accounts like RRSPs is certainly very powerful. If you do not require the funds from a RRSP and you anticipate your tax rate will stay the same over time then you should continue deferring taxes as long as possible. However, if you do require funds from your portfolio and have the ability to pay less tax now because you anticipate higher a higher tax rate in the future then strategic early RRSP withdrawals will allow other assets in non-registered accounts and TFSAs to continue compounding. – Sinan

#33 Sail Away on 11.11.22 at 5:10 pm

It used to be:

“Internet guy will fail at rockets/cars!”

Now it is:

“Rockets/cars guy will fail at Internet!”

Literally from same media outlets

-our hero, Elon, on Twitter today

#34 Sinan Terzioglu on 11.11.22 at 5:14 pm

#20 Luckych – If you contribute to a spousal RRSP for five years and then stop for three years and resume again then any withdrawals up to the amount that has been contributed by you over the previous three years will be attributable to you (the contributing spouse). For example, if you contributed $25,000 to a spousal RRSP over the previous 3 years and your spouse withdraws $30,000 from his/her spoual RRSP in year three then $25,000 will be attributable to you and only $5,000 will be taxed in your spouses hands at his/her lower tax rate – Sinan

#35 Shawn on 11.11.22 at 5:30 pm

RRSP Tax

#29 Josh in Calgary on 11.11.22 at 4:43 pm

Any time you can take money from the RRSP at a low tax rate you go ahead and do it.

The money doesn’t compound “tax free” in an RRSP. It compounds tax deferred.

********************************
First, don’t get in a low tax bracket before retirement.

Second, I have done the math. If you consider that the RRSP deduction is a sort of “rebate” it has funded a portion of your RRSP. A 10,000 RRSP contribution costs you Say $6000 after the rebate. Consider you put in $6k and the tax man put in $4k. 40% marginal tax rate.

If the marginal tax rate is unchanged that portion will grow exactly to pay the tax at withdrawal. Your portion will have grown tax free. This math is correct. Look up comparisons of TFSA to RRSP at different tax rates.

If the tax rate at withdrawal is higher than the marginal tax rate at contribution then yes, it was a deferral but you will find it is a pretty low tax rate after you consider that the portion of your RRSP that was effectively funded by the tax refund has grown along with the RRSP and portion pays most of the tax.

Anyhow, I can’t argue with those who have religion on this. The math is the math and you are wrong.

#36 IHCTD9 on 11.11.22 at 5:34 pm

#29 Josh in Calgary on 11.11.22 at 4:43 pm
#12 Shawn on 11.11.22 at 2:50 pm
DO NOT Withdraw RRSP funds until Retirement

Those talking about using a spousal plan and withdrawing after three years without attribution just don’t get.

The magic of tax-free compounding can’t work if you cut it off at the knees.
————————

I’d say you’re wrong on this. Any time you can take money from the RRSP at a low tax rate you go ahead and do it.

The money doesn’t compound “tax free” in an RRSP. It compounds tax deferred. You will pay tax on it when you withdraw it. Actually, it’s worse than that, you pay tax as income instead of capital gains or dividends (half the tax rate).

If you have any room at all in your TFSA you take that money from the RRSP at a low tax rate and dump it straight into the TFSA where it will actually grow tax free.

Or you use it to retire debt.

It really depends on your use of proceeds
——

Don’t think so. Money in an RRSP does indeed compound tax free. And does so with untaxed deposits. You pay taxes when you withdraw, and you have a lot of control on how and when that happens. That means taxes will be minimal if you have “developed a plan” as Sinan suggests.

“Tax deferred” insinuates a sum levied outside your control. The reality is, you control what is paid out to a large degree. Better to have a plan and let the tax fee compounding run. Unloading 10 years before you have to can cut your gains in half. Make a plan, minimize the tax on withdrawals, and exploit the tax free compounding.

#37 Wrk.dover on 11.11.22 at 7:14 pm

#36 IHCTD9 on 11.11.22 at 5:34 pm

You pay taxes when you withdraw, and you have a lot of control on how and when that happens.
_________________________________

You usually remind us everyday that in the future we will be paying dearly for Justinflation.

Marginal taxes will be much uppa later.
Has to happen. Pay soon, save later.
That was our strategy, prematurely.

#38 ElGatoNeroYVR on 11.11.22 at 7:33 pm

#18 the Jaguar on 11.11.22 at 3:58 pm
@#13 ElGatoNeroYVR on 11.11.22 at 2:52 pm
I thought the “RRSP meltdown strategy involved investment loans where interest write off offset some of the tax implications of the withdrawals…..
But if you hate debt it’s not very appealing, never mind the volatility.
=========
Yeah ,that is not what I was thinking about. Ofcourse the borrowing thing is a No-Go.
You can just melt-it-down ( maybe a RRSP draw-down would be a better name for it) by simply taking money out of a RRIF instead on TFSA or non-registered.
It all depends on individual circumstances and any competent advisor should be able to do the math.

#39 Del on 11.11.22 at 7:38 pm

Oh yes, decumulation, it is not that hard if you saved prudently. We are now retired at 60, CPP is $1,700 a month, RRIF is flat 0.50% monthly $2,700 which outpaces our minimum RRIF withdrawals for the next 25 years and TFSAs fully stuffed worth $192,000. We have no non-registered investments accept only $50,000 cashable GICs.

A big non-registered pool of money is not needed as we have our TFSAs growing compound interest $10,000 a year with current balances and a surplus of $1,800 a month which funds future TFSA contributions of $12,000 a year and cash annual GICs that grow our income. In 5 years we get another minimum another $1,500 a month OAS which will boost our income and monthly savings. Our $2,700 a month RRIF will be replaced easily over 25 years with a much bigger savings, GIC money balances. We will still pay modest overall taxes of $13,000 a year or a modest 15.11% our $86,000 by 2027 in 5 years leaving us with net after expenses, taxes of $3,700 a month or $44,400 a year.

#40 Dr V on 11.11.22 at 7:48 pm

29 Josh

“I’d say you’re wrong on this. Any time you can take money from the RRSP at a low tax rate you go ahead and do it……………….. If you have any room at all in your TFSA you take that money from the RRSP at a low tax rate and dump it straight into the TFSA where it will actually grow tax free.”
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This is a good comment, though Shawn and IHCTD9 add
some alternative views.

Just to highlight some points

– The RRSP/RRIF income is flexible until you reach 71 when it’s all RRIfed and the minimum withdrawals set.
You should have an idea of what principal is optimum in
your situation at that time. If your investments make too much money, oh well.

– dividend income is not flexible as it must be declared in a non-reg acct whether you take it or drip it. It is also grossed-up and will gobble up room in a low tax bracket quickly. Too bad if you make too much money.

– cap gains in non-reg are great, but can be difficult to time to match other income. I could take gains now but
my income is high enough this year that it may be more tax efficient later – as long as the gain is still there.

– personal corps are not efficient from an investment income perspective, but they are highly flexible as far as timing and what can be held in them. My acct says to think of them as equivalent to an RRSP. So sad if you make too much money.

– TFSAs rock. Make all the money you can……

#41 Scott on 11.11.22 at 7:51 pm

I work a full time low wage job with 50 hour weeks, $45,000 a year gross as I am still saving almost $1,200 a month after all my CPP, OAS taxes, rent, groceries, insurance, gas and so on as I am able to do this I make my maximum annual RRSP contributions of $8,100 a year, take my RRSP tax refund of $2,000 a year and another $4,000 a year savings into my TFSA $6,000 a year. I have done this for 3 years now, 23 I am now with $45,000 in RRSPs, TFSAs. It can be done people.

#42 Phylis on 11.11.22 at 7:55 pm

Elon should sell green check marks for $9/mo. Fixed another problem!

#43 Harrison Bergeron on 11.11.22 at 8:41 pm

Rrsp strategic dereg for retirees with db plans
1. Identify tax bracket that you are in when in receipt of all guaranteed pensions (factor in pension split). You then crystalize withdrawals in that mtr. This is cheapest rate you will ever pay on rrsp withdrawals, lock in the best outcome.
2 use net proceeds to fund tfsa, if maxed out utilize non reg account as tax efficiently as possible. 50 % cap gains inclusion rate more flexible then fully taxable rrsp withdrawals.
3. This strat is important to lock-in most optimal outcome. Remember at 65 db bridge benefit ends but if you start cpp at 65 and oas your taxable income will be higher. Possibly higher mtr.
4. Dereg rrsp strategically, once fully deregistered can start oas without fear of clawback. Remember rrsp withdrawals that trigger clawback of oas means your pay more to get the money out.
5. Drawdown strategically early is also beneficial for estate purposes. Imagine a couple with 2 db plans and 2 rrsps. If one passes away first, then we have a scenario where survivor receives individual pension and survivor pension (possibly in higher tax brackets), both rrsps consolidated but now rrsp withdrawals will cost more as survivor has more taxable income and cant split income.
6. Even for estate purposes.. strategically dereg your rrsp as early as you can … to give less over time to cra… if you die with a sizeable rrsp/rrif and no spouse, your estate will owe big tax bill based on your tax brackets on your year of death.

Melting down rrsp strategically early in retirement is a sound plan, generally speaking for retirees with db pension plans.

What do you think?

#44 Luckych on 11.11.22 at 9:08 pm

#34 Sinan Terzioglu

Thank you very much for the example!

#45 Norland Coboconk Watchdog on 11.11.22 at 10:16 pm

DELETED (Advocates assassination)

#46 IHCTD9 on 11.11.22 at 10:26 pm

#37 Wrk.dover on 11.11.22 at 7:14 pm
#36 IHCTD9 on 11.11.22 at 5:34 pm

You pay taxes when you withdraw, and you have a lot of control on how and when that happens.
_________________________________

You usually remind us everyday that in the future we will be paying dearly for Justinflation.

Marginal taxes will be much uppa later.
Has to happen. Pay soon, save later.
That was our strategy, prematurely.
———-

The post-Trudeau tax fallout will be shouldered mostly by the working, middle class incomes and up. I foresee our individual incomes being in a low tax bracket. Our cost of living is only about 30K/yr, and there are no plans for an extravagant lifestyle.

I agree that taxes / fees will increase as the years tick by, though. As you say – it has to happen. In fact, at this point I’d consider it a miracle if when we arrive at retirement, that we might still be able to claim CPP/OAS at 65.

#47 IHCTD9 on 11.11.22 at 10:46 pm

#41 Scott on 11.11.22 at 7:51 pm
I work a full time low wage job with 50 hour weeks, $45,000 a year gross as I am still saving almost $1,200 a month after all my CPP, OAS taxes, rent, groceries, insurance, gas and so on as I am able to do this I make my maximum annual RRSP contributions of $8,100 a year, take my RRSP tax refund of $2,000 a year and another $4,000 a year savings into my TFSA $6,000 a year. I have done this for 3 years now, 23 I am now with $45,000 in RRSPs, TFSAs. It can be done people.
———-

Yes sir, a low cost lifestyle, high savings rate, and a long runway can make the magic happen even on a low wage. Pumping the investments when you’re as young as you are will turn into pure gold decades from now. Keep it up, and when you’re my age and not interested in the hustle anymore, you will have options few of your peers will have.

#48 Sail Away on 11.11.22 at 11:16 pm

#40 Dr V on 11.11.22 at 7:48 pm

– personal corps are not efficient from an investment income perspective, but they are highly flexible as far as timing and what can be held in them. My acct says to think of them as equivalent to an RRSP. So sad if you make too much money.

—————

Yes, there isn’t really tax benefit to investing through a closely-held corp. But there can be big benefit in selling corp shares to reap the lifetime capital gains exemption (LCGE).

Of course, it needs to be a company with value that someone wants to buy. That little wrinkle.

#49 cuke and tomato picker on 11.11.22 at 11:48 pm

Number 41 Scott keep up the GOOD WORK. lf the goal is CLEAR the price is CHEAP

#50 Geriatric Cowboy on 11.12.22 at 12:10 am

I’m married. I’m over 65 and three years away from a RRIF. I live in an opposite time zone. My cardiac specialist doesn’t like me flying distance. Surgery wait lists in Canada are dead on arrival.

Question:

Can a RRIF etc and an advisory relationship be set up remote/online. I’d require a retirement and estate transition plan but not an investment advisor/asset manager.

Is it one or the other with your shop? Do you take calls on these matters? Otherwise….any advice?

#51 under the radar on 11.12.22 at 5:48 am

12 no one size fits all. CRA takes 50% of your RRSP during year of death. Structure accordingly.

#52 Wrk.dover on 11.12.22 at 7:17 am

#43 Harrison Bergeron on 11.11.22 at 8:41 pm
What do you think?
_______________________________

I think you are absolutely correct.

You have articulated my attempt at making a point.

Thank you for taking the time to do so!

#53 Bezengy on 11.12.22 at 7:26 am

Retired at 55 over 3 years ago. Low cost of living is a huge advantage for sure. Despite smart strategies about minimizing tax I’m willing to bet most folks will just withdrawal what they need to live on and let the rest pile up till death. Few want to see their nest egg decrease.

Another issue is long term planning is fine, but one can expect big changes even in retirement. One might want to go back to work or have a unexpected windfall of cash from their investments. Some may buy big ticket items, even another property, or want to renovate. Hell, even a long boat vacation is over $20k now, not exactly cheap. Things change, and so may your mindset. Nothing can be written in stone, it doesn’t work that way.

#54 Sail Away on 11.12.22 at 9:12 am

#51 under the radar on 11.12.22 at 5:48 am

12 no one size fits all. CRA takes 50% of your RRSP during year of death. Structure accordingly.

—————

Luckily, one’s expenses drop significantly upon death.

#55 Oakville68 on 11.12.22 at 9:15 am

Retirees in their 50s and 60s expecting to have higher taxable income in the future because of defined benefit pensions and/or planned dispositions over time that will result in capital gains in non-registered accounts should consider early periodic withdrawals from RRSPs so that they are taxed at lower rates in the years their income is low. If an entire RRSP is converted to a RRIF the assets cannot be transferred back to a RRSP and you would be required to withdraw the annual minimum from that point forward so for maximum flexibility when planning period withdrawals from a RRSP, it would be best to not convert to a RRIF because RRSP withdrawals can be skipped in higher-income years.

Sinan
You most certainly could convert a RRIF back to a RRSP if annuitant is under the age of 71 *** I have completed for clients before.

#56 Tony on 11.12.22 at 10:19 am

I looked online and the Pension Income Tax Credit can also be applied by taking out a non-registered GIC at an insurance company. I was trying to find the lowest fees associated with it.

#57 Tony on 11.12.22 at 10:23 am

Re: #54 Sail Away on 11.12.22 at 9:12 am

If you live past 100 years old they don’t have much left to tax from your RRIF/RIFF’s and you can still gift all your money away before you die.

#58 Thanks on 11.13.22 at 9:06 am

Thanks for the blog Garth
Thanks for the tips Sinan
Never knew about the tax credit for RRIFs

#59 Jenn on 11.14.22 at 11:27 am

Excellent post. We definitely need to talk more about deaccumulation strategies and how we draw income when we finally retire. I particularly found Frederick Vettese’s book, ‘Retirement Income for Life’ and the strategies he lays out there very good. The book also has an excellent Morneau Shepell url where you can use their on-line calculator to help you with a plan based on your available savings at retirement, age, etc.