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:
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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.
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.
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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.
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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.
