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Managing the Drawdown of your RRIF/RRSP

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Many of us have worked hard all of our lives to build up our retirement nest egg in our RRSP funds. We’ve been successful enough to build a RRSP nest egg in excess of $1million to see us through our retirement.

Now we are at the stage of flipping the RRSP into a RRIF and managing the drawdown of our funds, which requires a balance between CRA’s required minimum withdrawal, lifestyle needs, longevity, and tax efficiencies. Some things to consider include:

  1. You can flip your RRSP into a RRIF as early as 60 and as late as 71. Once you’ve changed it into a RRIF you must make the minimum withdrawals per CRA or face penalties. You can leave your funds as RRSPs during your early 60’s, still make withdrawals to meet your lifestyle needs, but not have to meet CRA imposed minimum standards.

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    At age 65, when you are eligible for a pension income tax credit, you may want to consider transferring a portion of your RRSP to a RRIF to take advantage of this credit.

  2. Historically we’ve been taught to leave our RRSP untouched as long as possible to maximize the benefit of the deferred tax bill. However, you are eligible for Old Age Security (OAS) payments after age 65, which are income tested.

    You might be better off to start your RRSP withdrawals in your 60’s so that when age 71 hits and you have an annual Required Minimum Distribution (RMD), you’ve reduced the total RRIF and subsequent annual RMD to the point that it is under the income threshold for OAS clawback. Alternatively, if your RMD is large enough that your OAS will be clawed back 100% for the balance of your life, you could trigger a one-time liquidation of a portion of the RRIF now, to get your RMD below the OAS clawback threshold.

    Finance professor Moshe Milevsky says Canada’s Required Minimum Distribution (RMD) rates from tax-sheltered accounts are higher than most countries, including the U.S. At age 75, Canada’s RMD is 7.85%, versus 4.37% for the U.S., 6.31% for the U.K., 6% for Australia and 3% for Ireland. Canada’s RMD is also highest at age 90: a whopping 13.62%, versus 8.77% for the U.S., 6.31% for the U.K., 11% for Australia and 3% for Ireland. (Financial Post)

    There are tax strategies that you can use to reduce the taxes on a one-time significant RRIF withdrawal.

  3. When the first spouse passes away, the RRIF/RRSP passes to the surviving spouse (assuming that is the beneficiary choice) without tax consequences. However, when the second spouse passes away the remaining RRIF/RRSP is dissolved and taxed at normal tax rates. In Ontario, the estate of an individual leaving a RRIF/RRSP greater than $509,000 to anyone other than their spouse will be subject to the maximum tax rate of 49.53%. Imagine an estate with a RRSP/RRIF of $1million – and half goes to Ottawa.

    There are tax and estate planning strategies to help manage this tax bill – either before you get to that stage or at the time of passing.

Most of us have a goal, while we are still employed, to build up our retirement nest egg to fund a comfortable lifestyle in our retirement. Once you have retired, you now need to manage the drawdown in a tax efficient manner. It’s not just a matter of calculating what your minimum RMD is each year.

If you work with a financial planner, discuss with them options you can put in place now on how to minimize your taxes and maximize the value of your estate. TriDelta Financial has expertise to assist you with tax strategies, which may save huge dollars. Contact us for a no obligation consultation.

Gail can be contacted by email at gail@tridelta.ca and by phone at (905) 399-2035.

Welcome Home!

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Are you a Canuck residing in the US, but planning to return to Canada?

We have had many inquiries recently from Canadian citizens living in the US, who are considering moving back to Canada, wanting to know their options.  There are many things to consider before returning home.

While Canada offers many wonderful things to those returning home, such as safety, great public services, freedom, being close to family, seeing old friends and a system you can trust. It is also a move back to the land of taxes, rules and regulations, rain and snow. Whatever your reasons for returning, there are many things to understand before making this move.

The biggest question is Why do you want to move back to Canada?  The answer to this involves learning about what is important to you – what you want life to offer you and what changes you are willing to make and what costs you’re likely to incur if moving to Canada is the right choice for you.

Once you have answers to the following questions, you will be able to make a more informed decision:

Where do you plan to settle in Canada. Different provinces offer different amenities, services, and taxes. Will you buy or rent. Did you know that only Canadian sources of income are considered for a Canadian mortgage.

Understand the changes to your tax situation. How will your income be taxed, do you need to file  tax returns in both Canada and the US and for how long? Understand when you are deemed a resident and the tax consequences of this. Have you done a before and after tax comparison. How will a move affect your estate plan.

Prepare your finances. Prepare a summary of Lifestyle expenses. What costs more, what costs less and determine if you can afford the move and changes. Did you know you may be able to combine US Social Security and the OAS payments. Is this the right option for you. How does this fit with your capital preservation goals.   Are assets joint for estate purposes. If you have a foreign Pension, can it be paid into a Canadian account. How will you access these funds.15882723_s

Do you have a US green card? Should you keep it and what are the implications of this.

Do you have insurance i.e. life, disability and/or long term care? If so, is it good for services in Canada, or only within the USA.

Will you keep funds outside of Canada? What are the implications of this.

Do you have pets?  Understand what is required to bring these into Canada.

Do you have a drivers Licence and vehicle? Can you  “convert” your current licence to a driver’s license in the province you will be living in. Can you bring your car with you. You can only import cars from the U.S. and only under certain conditions.

Understand Health Care in Canada. Know the rules in different provinces. There is no coverage for the first 3 months if you move to British Columbia, Ontario, Quebec, or New Brunswick. Other provinces do not require a waiting period. You may need to buy 3 months of health insurance in Canada or go three months without health insurance. You assume the risk and potential costs of any health issues that come up within that time period.

Research the availability of medical services. What are the services and availability of a family doctor in the area where you want to live. Some doctors in are not taking on new patients. Some services have a 3 to 6 m delay.

Friends?  If you have made deep friendships in the U.S., you will have to make new friendships or renew old ones in Canada. The older you get the harder it is to make significant friendships. Is it worth coming back to Canada?

Quality of Life. Will your quality of life and bottom line improve by moving to Canada vs. the US. What are you are giving up. Some feel Canada is expensive, cold, and dark in the winter. Some things do cost more , such as taxes, gas and groceries, however other things may cancel that out, such as not having to pay for costly health insurance premiums and deductibles and at 65, receiving minimally costing drugs.  Only you can determine your cash flow and what makes sense for you.

As long as you have weighed your options and know what the bottom line looks like, the next step is to make the decision about returning home.

Regardless of your choice, TriDelta Financial can assist you in managing your assets on both sides of the border and connect you with a team of mortgage, tax, investment and legal specialists to assist you in making your transition smoother.

Heather can be contacted by email at heather@tridelta.ca and by phone at (416) 527-2553.

Four ways single seniors lose out

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Becoming single in old age could cost you tens of thousands of dollars through no fault of your own. The current tax and pension system in Canada is significantly tilted to benefit couples over singles once you are age 65 or more.

I don’t think it is an intentionally evil plan of the Canada Revenue Agency and other government agencies, but something has to change. Given the fact that so many more single seniors are female, this unfairness is almost an added tax on women.

StatsCan recently came out with census data that said that among the population aged 65 and over, 56% lived as part of a couple. This 56% of couples was split out as 72% of men, and just 44% of women. Among those aged 85 and over, 46% of men and just 10% of women lived as part of a couple. This gap is made up of two factors. Women live longer than men, and men tend to marry younger women.

Here are four ways that single seniors lose out:

  • There is no one to split income with. Since the rules changed to allow for income splitting of almost all income for those aged 65 or older, it has meaningfully lowered tax rates for some. For example, in Ontario, if one spouse has an income of $90,000 and the other has an income of $10,000, their tax bill would be $22,571. If instead, their income was $50,000 each their tax bill would only be $17,774, a pure tax savings of $4,797 per year. If you are single, you are stuck with the higher tax bill.
  • Let’s say the 65-year-old couple both make $50,000, and qualify for full Canada Pension Plan. In 2012, that would be a total of $986.67 per month at age 65 for both of them or $23,680 annually for both combined. If one passes away, the government doesn’t pay out more than the maximum for CPP to the surviving spouse. They will top up someone’s CPP if it is below the maximum, but in this case, they simply lose out almost $12,000 a year. They would receive a one-time death benefit of a maximum of $2,500, but that is all.
  • RSP/RIF gets folded into one account. This becomes important as you get older and a larger amount of money is withdrawn by a single person each year — and taxed on income. Let’s say a husband and wife each have $400,000 in their RIF and they are age 75. They are forced to withdraw $31,400 each or 7.85%. If the husband passes away, the two accounts get combined, and now his wife is 76, with a RIF of maybe $775,000. At that amount, she would have a minimum withdrawal of $61,923. As in the first example, her tax bill will be much larger when she was 76, than the combined tax bill the year before, even though they have essentially the same assets, and roughly the same income is withdrawn.
  • Old Age Security. The married couple with $50,000 of income each, both qualify for full Old Age Security — which is now $540.12 a month or $12,962 a year combined. If the husband passes away, you lose his OAS, about $6,500. On top of that, in the example in #3, the wife now has a minimum RIF income of $61,923, and combined with CPP and any other income, she is now getting OAS clawed back.

The clawback starts at $69,562, and the OAS declines by 15¢ for every $1 of income beyond $69,562. If we assume that the widow now has an income of $80,000, her OAS will be cut to $414.50 a month or another $1,500 annual hit simply because she is now single. In total, almost $8,000 of Old Age Security has now disappeared. As you can see, a couple’s net after-tax income can drop as much as $25,000 after one becomes single.

On the other side, there is no question that expenses will decline being one person instead of two, but the expenses don’t drop in half. We usually see a decline of about 15% to 30%, because items like housing and utilities usually don’t change much, and many other expenses only see small declines.

In one analysis our company did comparing the ultimate estate size of a couple who both pass away at age 90, as compared to one where one of them passes away at age 70 and the other lives to 90, the estate size was over $500,000 larger when both lived to age 90 – even with higher expenses.

So the question becomes, what can you do about this?
I have three suggestions:

  • Write a letter to your MP along with this article, and demand that the tax system be made more fair for single seniors. You may also want to send a letter to Status of Women Minister Rona Ambrose, as this issue clearly affects women more than men.
  • Look at having permanent life insurance on both members of a couple to compensate for the gaps. Many people have life insurance that they drop after a certain age. The life insurance option certainly isn’t a necessity, but can be a solution that provides a better return on investment than many alternatives and covers off this gap well. If you have sufficient wealth that you will be leaving a meaningful estate anyway, this usually will grow the overall estate value as compared to not having the insurance — and not hurt your standard of living in any way.
  • Consider a common law relationship for tax purposes. I am only half joking. If two single seniors get together and write a pre-nuptial agreement to protect assets in the case of a separation or death, you can both benefit from the tax savings.

Ultimately, the status quo is simply unfair to single seniors, and that needs to change.

Ted Rechtshaffen is a regular contributor to the National Post, see http://business.financialpost.com/author/fptedrechtshaffen/

If you have questions or want to discuss your personal situation, please call Ted at 1-888-816-8927 x221 or email him at tedr@tridelta.ca.

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