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Withdrawing from RRSPs before age 71?

19K views 89 replies 20 participants last post by  heyjude 
#1 ·
Looking for some comments. When & how does it make sense to start withdrawing income from RRSPs prior to age 71 - when presumably, one has to convert them to RRIFs? Say, in the years age 65-70? Just a matter of doing some calculations on your tax bracket(s)? OR...better to just let it sit there 'til you have to convert?
 
#2 ·
When I hit 65 I converted my RRSP to a RRIF and started aggressive withdrawals. Two reasons:

1). You can transfer 50% of the payment to your wife. You need to be 65 and it must be a RRIF to do so. She did not work and I'm trying to get as much income in her name as possible.
2). I'm delaying OAS until 70. I'm well into claw-back territory and I want my RRIF to be very small at that time so as to minimize the penalty.
 
#3 ·
I am withdrawing some RRSP funds early as well. If I don't, RMDs will force me into the highest tax bracket at age 71. Instead, I choose to pay some tax now in a lower bracket. Another reason to create a RRIF at age 65 is to take advantage of the $2000 pension tax credit.
 
#4 ·
I would think a starting point would be to add up all of one's income for that age to see how much income from all sources (don't forget investments, all forms of pension etc.).

Then there's looking at scenarios ... for example, some have posted they converted half or more of the RRSP to a RRIF at or before 65 to have low RMDs as well as spread out the income.


One thing to watch out for is that a direct RRSP withdrawal may have a withdrawal fee where other's have posted that their financial institution does not charge fees for RRIF payments.


Cheers
 
#11 ·
I would think a starting point would be to add up all of one's income for that age to see how much income from all sources (don't forget investments, all forms of pension etc.).

Then there's looking at scenarios ... for example, some have posted they converted half or more of the RRSP to a RRIF at or before 65 to have low RMDs as well as spread out the income.


One thing to watch out for is that a direct RRSP withdrawal may have a withdrawal fee where other's have posted that their financial institution does not charge fees for RRIF payments.

I opened up an RRSP last year (age 70) and will have to convert it to a RIF by end of this year as I have already turned 71.

The problem I have now is that the reason that I opened up my RRSP last year, was to have a tax sheltered vehicle for my Nortel settlement lump sum, estimated to be around
($24k-40K).

Unfortunately, the early settlement I was expecting in Apri, l is not going to materialize because two former employees on LTD, have filed a lawsuit against the
Nortel estate in Ontario court of Appeal, which was waived by the appeal court judges.

The two employees are now considering hiring a constitution lawyer and taking it to the SoC as a human rights issue.

www.cbc.ca/news/canada/ottawa/nortel-workers-disability-bankruptcy-court-1.3950833


I was wondering if this case is accepted by the SoC, what should I do with my RRSP conversion ($2500) before December 31st.
I would like to avoid paying a bigger tax hit for just ONE year when I finally receive my settlement.

Anybody have some viable ideas what to do?
 
#5 ·
Same here. In first year of retirement I plan to transfer some RRSP funds to a RRIF, then from retirement to age 71 I will withdraw a set amount ($ 5 figures) from RRIF each year in order to minimize OAS clawback when mandatory conversion of all RRSP to RRIF takes place.

Another factor is for a couple when the first spouse passes away the RRSP/RRIF passes to the surviving spouse. Depending on the size of both RRIFs that may cause the tax rate of the surviving spouse to go much higher due to larger mandatory RRIF withdrawals. This one is very difficult to model, since lifespan can only be guessed at.

The article at this link explains it in a lot of detail.
http://www.rgafinancial.com/articles/What-Account-Should-I-Draw-From-First-In-Retirement.pdf

Note the above article is a couple of years old, so it does not mention the possibility of deferring OAS to 70. The tax rates mentioned are from Alberta. Taxtips.ca is a good site to get current tax rates by province.
 
#7 ·
Same here. In first year of retirement I plan to transfer some RRSP funds to a RRIF, then from retirement to age 71 I will withdraw a set amount ($ 5 figures) from RRIF each year in order to minimize OAS clawback when mandatory conversion of all RRSP to RRIF takes place.
Every case is different of course. In my case, I spreadsheeted the scenario you point out, and when I included the loss of tax deferred compounding from retirement to age 71, the results ended in a wash. No amount of manipulating the data worked in my favour to any degree that would make me take the leap to start withdrawing from those tax deferred funds. I also had to include the taxes now created from those new funds withdrawn that were now in a taxable account. The introduction of the TFSA helped a bit with the situation, but never enough to make me pull the trigger. Every scenario I tried usually resulted in an advantage in my favour after age 90, so I decided I would wait until they force me to convert. Lots of things can happen by then, the least of which has already started by the lowering of the percentage of mandatory withdrawals.

But again, every case is different, so if anyone thinks this tactic is a slam dunk should do some detailed examination.

ltr
 
#13 ·
[B said:
GreatLaker;1508586]Same here. In first year of retirement I plan to transfer some RRSP funds to a RRIF, then from retirement to age 71 I will withdraw a set amount ($ 5 figures) from RRIF each year in order to minimize OAS clawback when mandatory conversion of all RRSP to RRIF takes place.
What "clawback" are we talking about here? I'm not aware of any clawback of OAS just because you decided to take ($10k) out of your RRIF/
Certainly the $10k you take out of the RRIF will have some withholding tax (20%) but that is just viewed as taxable income, same as OAS which is taxable as well.
 
#30 ·
Can someone clarify: Is there any difference -from a tax point of view - in withdrawing funds from an RRSP vs getting a payment from an RRIF (or a LIF, in my case)? Aren't they both taxed the same as income???
If you want to qualify for the $2,000 pension income credit, I believe it must come from RRIF.
RRSP withdrawal won’t give you this credit.

I don't know about LIF.
 
#22 ·
One thing to watch out for is that a direct RRSP withdrawal may have a withdrawal fee where other's have posted that their financial institution does not charge fees for RRIF payments.
True!

I'm well into claw-back territory and I want my RRIF to be very small at that time so as to minimize the penalty.
If I decide to retire completely in couple of years, I'm planning to convert my Spousal RRSP into SRRIF and depends on income probably also convert RRSP to RRIF.
First of all , there is no attrition rules for Spousal RRIFs for minimum withdrawals, so those withdrawals will be against my income, and not against my working spouse. My spouse will open another SRRSP and will continue to contribute all RRSP room available there.
Thus before I hit 65 , my RRIFs will be smaller ... to avoid possible claw-back.
What I don't understand.... there is no withdrawal maximum for RRIF, so what the difference if you withdraw from RRSP or from RRIF?

p.s. while was typing,jargey ask same question :)
 
#24 ·
What I don't understand.... there is no withdrawal maximum for RRIF, so what the difference if you withdraw from RRSP or from RRIF?
My understanding is that you can't withdraw from an RRSP unless you cash the whole thing in. I have done this with a GIC. But to set up recurring payments, you have to convert your RRSP to a RRIF. Of course, you could just take a chunk of your RRSP and convert it to a RRIF, and then you would have both.
 
#35 ·
Once you convert to a RRIF you will be required to withdraw the minimum amount annually.
I understand it :), but some people who needs to withdraw cash, prefer to do it from RRSP and not from RRIF ... I don't see a reason why I would like to stop RRIFs minimum withdrawals... Also,if you withdraw from RRSP , you pay withholding tax right away, from RRIF - you don't...
btw,if you withdraw more than RRIF minimum, should you pay withholding tax right away?
 
#41 · (Edited)
.. Also,if you withdraw from RRSP , you pay withholding tax right away, from RRIF - you don't...
btw,if you withdraw more than RRIF minimum, should you pay withholding tax right away?
Where the RRIF withdrawal exceeds the minimum, the financial institution is required to withhold tax at the same rate as a similar sized RRSP withdrawal. For example if the minimum RRIF withdrawal is $3K where one withdraws from the RRIF $7K, the minimum withdrawal is fine but the additional $4K will have the 10% withholding tax applied to it.

So for that part that is subject to the withholding tax, one is paying the withholding tax as the withdrawal happens ... only difference for the RRIF is that part of the withdrawal is not subject to the withholding tax.

No tax is withheld when the minimum amount is withdrawn from a RRIF.* When withdrawals in excess of the minimum amount are made, the above RRSP lump sum withholding tax rates apply.
http://www.taxtips.ca/rrsp/withholdingtax.htm


Cheers


PS

Or to put it another way, YMMV where being over the RRIF minimum withdrawal = withholding taxes being deducted.
 
#39 ·
Look..... you are all missing a major point. It depends when you actually die. If you choose to melt down your RRSP and you die prematurely, then your estate will benefit. If you live to a ripe old age, your estate loses. The reverse is true, if you max/shelter your RSP and live to a ripe old age, your estate benefits.... if you die early your estate loses. It is (not) simple math.
 
#43 ·
I have no pension (other than CPP/OAS) so I prefer to minimize the likelihood of me running out of money in the event that I do live a very long life. Even if my estate gets less as a result of it. Not unusual in my family to live to 90 unless succumb to disease.

So steve41 in the scenarios where my estate loses does that mean I win? Or does the tax man win?
 
#42 ·
I think this is difficult to model and evaluate without considering investment returns and tax rates and how they change over time. Tax rates don't change that much, but investment returns can vary widely. And lifespan is a wild card for most people.

IMO if you withdraw from RRSP/RRIF earlier than required:
  • Costs: additional taxes from retirement to year you turn 71, plus lost investment returns on those funds.
  • Benefits: 1) avoid 15% OAS recovery tax (aka clawback) if your income is in the clawback range (~$75-121k for 2017); 2) possible lower tax rates - I expect my marginal tax rate will jump up significantly the year I hit 72 and mandatory RRIF withdrawals start so money withdrawn earlier is taxed less.

Calculate the net present value of costs and benefits for various withdrawal amounts to estimate breakeven age.
 
#44 ·
Costs: additional taxes from retirement to year you turn 71, plus lost investment returns on those funds.
In my case if I convert both SRRSP and RRSP to SRRIF and RIFF, my income in today's portfolio values will be respective $7,300 + $5,000 , interest income maybe around 7-8K (very difficult to calculate as GIC mature in different years). Thus my average tax will be below 10%. I'm thinking first to convert only SRRSP to SRIFF and see what taxes I should pay....from my estimation it's only 5$.
And my wife will continue to contribute into new SRRSP (after pension adjustment she has about $6,500 room annually) , so she gonna shelter the highest possible margin tax rate (as she has big salary) ... The rest SRRIF withdravals I will put into TFSA , sothere won;t be any loss of investment return.
Thus, at 65 (if I still will be alive), I may even to qualify for some GIS
 
#46 ·
The rest SRRIF withdravals I will put into TFSA , so there won;t be any loss of investment return.
Thus, at 65 (if I still will be alive), I may even to qualify for some GIS
Wishful thinking, you do realize that there is a threshold for your income to qualify for the GIS?

https://www.canada.ca/en/services/b...guaranteed-income-supplement/eligibility.html

The maximum allowed income levels for these four different rate tables effective January 2016 through March 2016 are as follows:

Rate Table Maximum Allowed Income(combined income if a couple) Maximum monthly GIS
1 $17,376 $856.39
2 $22,944 $515.53
3 $41,664 $856.39
4 $32,160 $515.53

https://www.canada.ca/en/services/b...ranteed-income-supplement/benefit-amount.html
 
#45 · (Edited)
So far, nobody has given me some ideas on how to convert my RRSP to a RRIF. I'm being conservative here setting up a RRIF by years end.
Should I be looking to an insurance company to set it up as an annuity?

http://www.taxtips.ca/rrsp/convertrrsptorrif.htm

and here is the calculator in my case
http://www.taxtips.ca/calculators/rrsp-rrif/rrsp-rrif-withdrawal-calculator.htm

Due the the small amount of money (Nortel settlement and my current RRSP) , calculating a modest safe growth of 3% and withdrawals of $3k per year starting in 2018,
I'm good to age 91....if I withdraw more, only to age 85.
 
#49 ·
So far, nobody has given me some ideas on how to convert my RRSP to a RRIF. I'm being conservative here setting up a RRIF by years end.
Should I be looking to an insurance company to set it up as an annuity?
If your RRSP is at an on-line brokerage, all you have to do, is open a new RRIF account with them, then transfer whatever amount you wish into that account from your RRSP (they should have forms for you to do this - talk to them). This can be stocks, cash, GICs etc. There is not much difference between an RRSP and a RRIF and once 71 the RRSP turns into a RRIF anyway. (You can do same if you have your RRSP elsewhere) Then you draw at least the minimum amount each year. No withholding on minimum, but there will be on any excess over minimum. Not a problem, because withdrawals are income and taxable anyway. If you are over 65, that withdrawal counts as pension income and you get the $2000 pension deduction when you file your taxes. With interest rates low, annuities are not attractive.

By the way, in your example you chose 8% return and 2% inflation. (6% Real Return) That would be nice, but not realistic. 2-3% real return might be more realistic (4-5% today)
 
#48 ·
Wishful thinking, you do realize that there is a threshold for your income to qualify for the GIS?
If income considered for couples, we never gonna get GIS (unless we getting divorced) :(
Typical government bullshit, the taxes is calculated as per individual income (even puny $2,000 split was cancelled), but GIS qualification is calculated as per family income... Ridiculous!
 
#50 ·
I'd be curious to hear from you (retirees) about your RRSP withdrawal strategies that include the following...so far...great insight....

1. convert some RRSP to RRIF in early 60s?
2. keep some RRSP until forced into another RRIF in 70s?
3. the balancing act between 1. and 2. 50/50? 25/75? 75/25? I suppose it "depends" on the income you need but also how long you might expect to live - as per Steve41.

Not easy to predict! Kudos to those that have figured out a great strategy working for them...
 
#51 ·
I'd be curious to hear from you (retirees) about your RRSP withdrawal strategies that include the following...so far...great insight....

1. convert some RRSP to RRIF in early 60s?
2. keep some RRSP until forced into another RRIF in 70s?
.
It depends on just how much you have in RRSP. In our case, we had a lot more in RRSP than we had out.

We retired or more accurately, stopped working, because we were self employed, when I was about 64. No pension, so other than CPP/OAS and unregistered investments, no income. We took this opportunity to start drawing from our RRSPs. To do this, we opened RRIFS and transferred part of RRSPs to RRIFS. We didn't want too large a mandatory minimum (at that time, required was higher than now), so just added more to RRIF each year.

Our aim was to keep our taxable income in a lower tax bracket. Something like $30k each if I recall correctly. Because of CPP/OAS/other income, this limited amount we could draw from registered accounts. One other thing we did to reduce investment income (and allow larger RRIF withdrawal) was to invest in funds or equities that included a fair % of ROC in their distributions (ROC is not immediately taxable but can be as CG down road) In the end, our RRIFs still grew, albeit at a lower rate than if we hadn't withdrawn anything. And of course we could claim the $2000 pension deduction.

You do need to do the math. Rather than a spreadsheet, I played with one of the free tax programs to determine just how much we could withdraw. If you have CPP/OAS/Investment income, it is not much if you want to stay in a lower tax bracket than you will be in at 71.
 
#53 ·
Yes, a fine example of good planning. My plan actually has two parts. I'm aggressively reducing my RRIF until I hit 70 at which point I apply for OAS and reduce the payment to just over the minimum from then on. The other part of the plan is to convert my wife's spousal RRSP to a RRIF in the same year and begin drawing hers down at a fairly aggressive rate. That way I get 50% of my RRIF and 100% of her RRIF on her tax return. Mine drops in the same year hers kicks in with the same combined income from both RRIFs.

If I had a do-over the only thing I would do differently would be to have put all my contributions into the spousal RRSP and not even bothered with one in my name. That way 100% of the RRIF income would have been on her tax return. I had roughly equal amounts in each RRSP.

My advice to one-income couples: Make good use of the spousal RRSP. (That is assuming you plan to stay married.)
 
#61 ·
I am 56 very interesting conversation,,, topic is one of value to me and us that are to retire before 60 ,,i will be 56 so there is lots of info I am not aware of,,,Thanks for the info,,,like I have explained very poor planning on my part,,having enough cash is only a small part of the plan,,,making the cash is the easy part,
 
#65 ·
If all your savings are in tax-deferred accounts it's not an issue. It really depends on individual circumstances as you can see from the varied analysis by different posters.
Yes, majority of my saving in tax-deferred accounts, in non-reg I have only GIC/HISAs, as per today value interest I get is about $7,000
If I switch SRRSP to SRRIF is 2 years, my RRIF minimum (at current market value) will be $7,000 and if I switch also RRSP to RRIF , RRIF minimum will be $4,800 ....
Thus, as per calculator,
You'll owe about $1,543 in tax: $1,099 in federal tax and $444 in provincial tax. Your after-tax income is $17,257. Your average tax rates are 8.21%
If I switch both to RRIFs at age 60, my minimums will be $8,957 + $6,109, + $7,000 interest from GIC/HISA
You'll owe about $2,198 in tax: $1,589 in federal tax and $609 in provincial tax.
Your after-tax income is $19,868. Your average tax rate are 9.96%
+ more taxes if I start getting CPP.

If I switch both to RRIFs at age 65, my minimums will be $10,749 + $7,331, + $7,000 interest from GIC/HISA
You'll owe about $2,802 in tax: $2,041 in federal tax and $761 in provincial tax.
Your after-tax income is $22,278. Your average tax rate are 11.17%
+ more taxes if I start getting CPP/OAS.
Thus, from what I understand, the best case scenario is to start RRIFs at 52.... or am I missing something?
 
#68 ·
Yes, majority of my saving in tax-deferred accounts, in non-reg I have only GIC/HISAs, as per today value interest I get is about $7,000... Thus, from what I understand, the best case scenario is to start RRIFs at 52.... or am I missing something?
Gibor, You may already have all this sorted out, and I'm not suggesting you post it all.

What may be missing are:
i) the balances remaining in your non-reg and rrsp/rrif accounts over time, depending which scenario you choose,
ii) what total income you require and what % each of these income streams represent,
iii) how long you need this income
iv) other inc streams, tsfa assets, house, etc.

I'm just saying that we can't really comment in a meaningful way with only the income streams you list. As GL noted, it really depends on each individual's circumstances.

Frankly, the difference between paying $1.5k of tax at age 52 versus $2.8k at age 65 doesn't seem a compelling reason to make an irreversabe switch to rrifs at age 52 unless it is all part of a well considered plan.

For example, if you start rrifs at age 52 you will compromise their tax-sheltered growth and have reduced amounts remaining at age 60, 65, or 72 - is this baked into your numbers? And if you draw $7k a year from your non-reg beginning at age 52, how much will be left at age 60 or age 65 and how long will it last? - you show $7k/yr still from non-reg). If you draw $14k instead and leave rrsp's untouched what is the result? Alternatively, if you take more from rrifs and leave non-reg untouched, etc .....
 
#70 ·
That's a good one. I created a similar Excel spreadsheet for myself that resembles it, but includes my wife's RIF in the calculations. Mine is not as pretty as the taxtips one but the numbers compare. Not very hard to build really, and I have lots of time on my hands.
 
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