When Should I Withdraw from my RSP?


Ever wondered the right time to start withdrawing from your RSP is? Providing us with a detailed examination of what time is the best to draw from your RSP is our Senior Financial Planner, Brad Mol.

He writes, “There is not a one-size-fits-all answer. The traditional view of RSPs is to prolong withdrawing from them for as long as possible, exhausting all other sources of income first, but this is not necessarily the right strategy.

For example, I recently completed a retirement plan for a couple whose potential sources of income included government pensions, RSPs, non-registered investment accounts and Tax Free Savings Accounts (TFSAs). Their strategy had been to fund any gap between their government pensions and lifestyle expenses by withdrawing funds from their non-registered
accounts, waiting to use any of their RSPs until they were required to convert them to a Retirement Income Fund (RIF) at age 71. The idea being to use up the investment funds that annually generate taxable income, and leave the investments that are sheltered from tax in the RSP and TFSA for as long as possible.

I put together a projection of what their financial life could look like doing it this way and found
the following:

  • Their current average tax rate was very low.
  • If they waited to withdraw from their RSPs the accounts continued to grow.
  • At age 72 the mandatory withdrawal from their RIF would substantially increase their average tax rate.
  • The higher taxable income would see the couples Old Age Security (OAS) benefits (payable from age 65) almost entirely clawed back.

To help reduce the future tax burden and claw back of OAS benefits, one solution was to take advantage of their current low tax rate and make early RSP withdrawals in strategic amounts. Any remaining cash flow gap would still be funded with their non-registered investments.

While their tax rate in the short-term increased slightly, the total amount of tax paid over their lifetime actually decreased. The early withdrawals also contained the growth of the RSP which reduced the size of future mandatory RIF payments. The reduction in income at age 72 was enough to avoid the claw back of their OAS benefits.

In this scenario, had the size of the RSP accounts been more modest the original strategy may have worked well. The increase in taxes at age 72 may not have been significant, and also may not have bumped their income over the OAS claw back threshold.

Everyone’s situation is different and when and how much to withdraw from your RSP can depend on a few key factors including:

  • Cash flow needs
  • Sources of income available
  • Size of your RSP portfolio
  • Current and expected future tax rates

So when should you withdraw from your RSP? The short answer is ‘When you are going to pay the least amount of tax!’

Working with a CFP to develop a personal financial plan can help identify what strategies would work best for you.”

Should I Maximize my RRSP Contribution?


Maximizing your RRSP savings is not always a good idea

How do you know if maximizing your RRSP contributions this year is a good idea?

The mutual fund industry will always tell you to maximize, maximize and maximize, despite your personal circumstances. What they fail to mention is that this can lead to massive tax bills on your estate, when almost half of your RRSP/RRIF funds can go to the government in taxes (as the government taxes it as “income earned in one year”)!

The key to avoiding this tax situation lies in how you contribute to your RRSP on a yearly basis. The general idea here is that you should maximize your RRSP in the years when you can save taxation this way. In the years when you have a low tax bill, you should avoid putting anything in your RRSP. This way, you can get the best combination of lower taxes both now and in the future.

For any particular year, these are the three key questions to ask yourself:

1. What is the tax refund I will receive on each dollar of RRSP contribution
If you are in a higher income year, you will be receiving a higher tax refund (i.e. for $127,000 of taxable income, the refund is 46 cents per dollar). Here, you will want to maximize your RRSP contributions to enjoy less present taxes and allow your money to grow tax-free until retirement.

2. What will my tax bill be when I take money out of my RRSP/RRIF?
If you are in a lower income year, then your present tax bill will be fairly low. If you are maximizing your RRSP contributions every year in this situation, then you are simply creating a higher tax bracket for yourself in the future. Consider what your future tax bracket will be in your RRSP/RRIF years, and if this is higher than the present tax bracket, then do not contribute to your RRSP.

3. How much time will the RRSP be able to grow tax-free?
Generally, the younger you are (with a decent income), the more you can benefit from long-term tax free growth so RRSP contributions are encouraged. However, if you are earning less than $40,000 (similar to question 2), consider an alternative like the TFSA.

Remember that RRSP contributions depend on your personal situation and can change from year to year. Speaking to a trusted financial advisor can help you make the most of these tax minimization strategies.
One quick and free tool can be found on our website. The Tridelta Retirement 100 helps you see your likelihood of running out of money, your likely estate size and lifetime tax bill. By playing with RSP numbers, you can see the impact yourself.