# withdraw RRSP with least tax??



## janiceco (Nov 13, 2011)

New to this site, but see excellent info. I have all my retirement savings in RRSPs. I am about 10 years from retirement and now realize I will be taxed heavily upon withdrawing any funds in the future. How can I get the funds out before retirement with little tax implications. Can I transfer some of my RRSPs to spouse with lower income an RRSP room, then take some out every year and pay only 10% for the first $5000 withdrawn? Possibly put into TFSA?? Need ideas.


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## slacker (Mar 8, 2010)

It is not that your RRSP will be taxed heavily. It is that you were never taxed on those income you used to contribute to your RRSP, and the income tax was generously deferred by the government to allow to grow so you may retire comfortably.

So in short, it's time to pay your fair share of taxes.

PS: general pet peeve, people think it's unfair to have to pay taxes on RRSP, while enjoying tax refund year after year. sheesh.


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## steve41 (Apr 18, 2009)

The other thing to consider is that the future large tax paid on those RRSP withdrawals are.... wait for it... paid in the future. You must consider the present value of those future tax pmts vs the near term tax you will pay on those accelerated RRSP meltdown withdrawals. It is not the big deal you might imagine.


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## Homerhomer (Oct 18, 2010)

janiceco said:


> . Can I transfer some of my RRSPs to spouse with lower income an RRSP room, then take some out every year and pay only 10% for the first $5000 withdrawn? Possibly put into TFSA?? .


The answere is no to all of the above, and just because bank is witholding 10% upon withdrawal doesn't mean you are getting taxed 10%, your actual tax on it will be finalized upon filing your tax return, if your marginal rate is 30% you will have to pay the difference of 20%.

You can save on tax when you withdraw RRSP in a year when you have little or no other income.


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## MoneyGal (Apr 24, 2009)

The best way to save on the tax in an RRSP is to live a really, really long time, so you can postpone the withdrawals on your RRIF for as long as possible. (This is what Steve41 is saying.)

Other than that, if you are working, you would likely pay more tax by withdrawing now (given that you have other income) than you would by just leaving the RRSP in place and withdrawing as you need it. 

You might benefit from actually getting some financial planning (not investing) advice from an impartial third party (not someone selling investments), so you can understand this. If it is causing you anxiety, that is. 

Otherwise, I would personally file this in the category of "problems that are actually great to have."


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## steve41 (Apr 18, 2009)

There is a small actuarial glitch to the above. If you absolutely know that your chance of surviving into the next decade is slim, then you can make a case for attacking your RRSP with a vengeance in the near term. It will advantage your estate..... just.


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## carverman (Nov 8, 2010)

Homerhomer said:


> The answere is no to all of the above, and just *because bank is witholding 10% upon withdrawal doesn't mean you are getting taxed 10%, your actual tax on it will be finalized upon filing your tax *return, if your marginal rate is 30% you will have to pay the difference of 20%.
> 
> You can save on tax when you withdraw RRSP in a year when you have little or no other income.


That is so true. And BTW...there is a rule on withholding tax on withdrawal,
if the amount you withdraw is $5,000 or less..the bank withholds 10% and
gives you a t4 RRSP for that taxation year, if it's more, it's like 10 to 20%!
Then the RRSP funds withdrawal is added to your total income for the year. 
IF you are still working when you withdraw some RRSP, depending on the tax bracket you are in already, you COULD end up paying a LOT more income tax on the early RRSP withdrawal, besides the withholding tax.

I did that during the second phase of my post divorce-from-hell/alimony legal
battles (prior to actual retirement). This was planned a couple of years before my actual retirment, because I knew she would fight me over my
retirement income to feather her retirment nest. 

In order for the ex's lawyer and the $%^&*! judge, (who ordered indefinite support to my remarried ex until the day I die or file another motion to modify the support order), in order for the court NOT to consider any RRSPs I had as future retirement income,
I decided to collapse my RRSP (3 different portfolios) over a 3 year
period of the last 3 years of my work career, and pay the taxes rather
than pay out of the RRSP, additional support to the remarried gold digging ex.

The tax hit was *BRUTAL*, as I went over, to the highest income tax
rate, and had to pay an *additional Ontario tax penalty called the "Ontario Surtax" on taxable income* calculated, minus any Ontario tax credits on the Ontario tax form ON428.

They play a "numbers game" on that form, where you take the Ontario tax payable, then subtract $4,006 (or whatever it was back in 2000) x 20% 
and then the same line minus $5,127 and add up the difference and then
add that to your Ont tax payable.

This surtax also hit me pretty hard, I don't remember how much but it was a lot...still it was a moral victory because I managed to pay off the mortgage
with the remaining funds. 

I didn't care at that point, since the courts would have considered any RRSP
income besides my company pension, as income to pay support to the remarried $%$%! ex. 

So in summary, the gov't gets you either way..you take it out early, add it
to your taxable working income and pay through the nose...or you take it
out later in installments and pay your fair share of taxes. There is no
free lunch with taxes payable on RRSPs. 


< quote from online sources>
*Withholding Taxes*
Funds withdrawn from an RRSP will be charged withholding taxes. This amount must be held back by the plan administrator and remitted to the government on your behalf. 

Effective January 1, 2005, the following withholding tax rates apply: 

Amount of RRSP Withdrawal All Provinces Except Quebec 
Up to and including $5,000 10% 
$5,000.01 to $15,000 20% 
More than $15,000 30% 

You will receive a T4 RRSP receipt for any funds withdrawn during the year showing the amount to be included in your taxable income...
<endquote>


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## steve41 (Apr 18, 2009)

I have stated this time and again.... for the standard working-saving for retirement-living off savings in retirement individual.... the RRSP is very close to being tax-neutral. You can simulate the same individual under two separate savings strategies.... RRSP and TFSA.... the TFSA-saver will be just a hair better off. Estate-wise, not, but from a net income perspective, it is almost a toss-up.


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## Sampson (Apr 3, 2009)

Isn't another alternative to take leaves of absence or sabbatical, or better yet, retire early?


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## Cal (Jun 17, 2009)

Perhaps steve will have a better answer for this, but how many people actually take out and investment loan, in their retirement years, and use the investment interest to off set the RRSP tax hit, and use the investment loan to purchase the same equities that they held in their RRSP. ?


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## cardhu (May 26, 2009)

janiceco ... You probably won’t be taxed heavily upon RRSP withdrawals in retirement. Most people aren’t. Perhaps you have that impression because of the widespread suggestion that withdrawals would be taxed at your marginal rate. They aren’t. They are taxed as ordinary income, which means that the most tax-efficient way to draw funds from the RRSP is usually to draw it in smallish increments, over as long a period of time as possible, starting in your first full year of retirement, and to make full use of the pension splitting provisions for RRIF withdrawals after age 65. In other words, the most tax efficient is usually to use the RRSP exactly as it was meant to be used - to generate retirement income. 

Drawing the funds out while you are still working, over the next 10 years, may well be the surest way of being taxed heavily. Most RRSP “melt-down” schemes are sleight-of-hand illusions, and aren’t borne out by math. 

Steve raises a valid point about the possibility of dying before retirement. That is always a wildcard with RRSPs (among other things). But married couples are less exposed to this risk than are single people, because when the first spouse dies, most assets including the RRSP shift over to the surviving spouse with no tax implications. 

You can’t shift any of your existing RRSP over to your spouse, but you can place your future RRSP contributions into a spousal account if your earnings are higher, and particularly if you intend to retire before age 65. RRIF withdrawals before age 65 can’t be split, but a spousal RRSP accomplishes the same thing.


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## Homerhomer (Oct 18, 2010)

cardhu said:


> Perhaps you have that impression because of the widespread suggestion that withdrawals would be taxed at your marginal rate. They aren’t.


Yes, they are. If the income is $25K and the RRSP withdrawal is $5K, the individual will be taxed based on the taxed rate for the income between 25 and 30k. This formula applies to every income level.


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## MoneyGal (Apr 24, 2009)

Homerhomer said:


> Yes, they are. If the income is $25K and the RRSP withdrawal is $5K, the individual will be taxed based on the taxed rate for the income between 25 and 30k. This formula applies to every income level.


They are taxed at your marginal rate if and only if all withdrawals fall within the rate that also happens to be your marginal rate. 

This is quantitatively different from a rule which says "withdrawals are taxed at your marginal rate." 

You can manipulate (to some extent) the rate which will apply to RRSP withdrawals.


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## Sampson (Apr 3, 2009)

MoneyGal said:


> You can manipulate (to some extent) the rate which will apply to RRSP withdrawals.


How about using an employment 'wind-down'. Maybe shift to part-time during the last few years you are working, and make withdrawls at lower tax rates.


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## MoneyGal (Apr 24, 2009)

The brackets are broad. This may not reduce total tax payable, and has other effects which may not be desirable, depending on the OP's circumstances and her longevity risk aversion. Plus it has her paying the tax earlier, all other things held constant. 

It's hard to make general rules in this situation. Whether or not she's actually "ahead" (defined as paying less tax) in one scenario or another depends on many factors. Plus it exposes her to other risks including (potentially): 

- lower DB pension income (if she has a DB pension)
- lower CPP payouts (depending on her CPP situation)
- increased chance of running out of assets (if she lives a long time)
- increased risk of the sequence of returns effect (if she retires in a bear market)

[shrug] There are too many variables to hazard a guess as to what the "right" path is for her, and "paying less tax" is rarely the primary or cardinal value around which a financial plan should be organized.


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## cardhu (May 26, 2009)

Homer said:


> Yes, they are. If the income is $25K and the RRSP withdrawal is $5K, the individual will be taxed based on the taxed rate for the income between 25 and 30k. This formula applies to every income level.


No, they’re not. RRSP withdrawals are treated as ordinary income. Marginal rate is a possibility, but only in a worst-case scenario. Not every case is a worst case. 

If the income is $30k, of which $5k is RRSP withdrawal, then the income is $30k. Its impossible to know how much tax is attributable to that $5k slice, without examining circumstances. It could be as low as ZERO, or as high as the marginal rate, or anywhere in between. 

The notion that RRSP withdrawals are always the last dollar taxed is a fiction. A fiction that has certain uses, but a fiction nonetheless. 



MG said:


> They are taxed at your marginal rate if and only if all withdrawals fall within the rate that also happens to be your marginal rate.


And if there are no deductions or tax credits available.


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## OhGreatGuru (May 24, 2009)

janiceco said:


> ... Can I transfer some of my RRSPs to spouse with lower income an RRSP room, then take some out every year and pay only 10% for the first $5000 withdrawn? Possibly put into TFSA?? Need ideas.


No. You can't transfer existing RRSP money to your spouse. But since you are still working, you may make future contributions to a spousal RRSP instead of to your own. The tax deduction is yours, but she is the annuitant, and withdrawals will be taxed in her hands, which may help to equalize your retirement income. (Be aware of the 3-year rule for spousal RRSPS. If withdrawals are made within 3 years of the last contribution, it will be taxed back in your hands instead of hers.)

As others have pointed out, the rate of withholding tax is irrelevant to determining your actual tax liability.


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## cardhu (May 26, 2009)

Sampson said:


> How about using an employment 'wind-down'. Maybe shift to part-time during the last few years you are working, and make withdrawls at lower tax rates.


Lower than what? It hasn’t been established that OP will face problematic tax rates to begin with. For many (most?) people, the best opportunity for the lowest tax rates on RRSP/RRIF withdrawals occurs in retirement. There is a persistent perception that RRSP withdrawals are taxed at punishing rates, but in a great many cases, its more perception than reality. Many people who use RRSP as their primary source of retirement income could face tax rates on withdrawal of something in the 15% to 18% range during retirement ... its difficult to pull an RRSP withdrawal prior to retirement without paying at least that much. 

Carverman ... the ON surtax is neither a penalty, nor a numbers game ... its just part of the progressive tax formula ... it is already baked in to the marginal rates you see on so many summary tables ... its not in addition to those rates. 

Cal ... the so-called leverage meltdown is one of the sleight of hand illusions I was referring to.


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## Sampson (Apr 3, 2009)

cardhu said:


> Lower than what? It hasn’t been established that OP will face problematic tax rates to begin with.


I suppose we all assume (or at least I do) that by starting a thread like this, the OP is concerned that withdrawls made will be taxed at a high rate. 

You are correct, clearly it depends on how much will be taken during requirement. If the a retiree can live off non-registered account savings for the first while, they may not face any taxes at all. Age, income, potential risk of benefit clawbacks obviously play a role.


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## carverman (Nov 8, 2010)

Homerhomer said:


> Yes, they are. If the income is $25K and the RRSP withdrawal is $5K, the *individual will be taxed based on the taxed rate for the income between 25 and 30k*. This formula applies to every income level.


If I remember correctly, it's the taxable income and not the gross income.
Depending on your personal deductions and tax credits, you can whittle
some of it away, but if you are making 66 to 78K a year salary, you are
already in the highest tax tier, and adding $5K isn't going to make too 
much difference, except in Ontario, you will be paying an extra tax
called a surtax on any TAXABLE income above $66,514 (20%) and
at a taxable income of $78,361, it goes up to 36% (2011 tables)
http://www.taxtips.ca/taxrates/on.htm

In my case my gross income was already over 80K, and when I cashed in
portions of my RRSP ($20K or more) the surtax really started to bite.


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## Homerhomer (Oct 18, 2010)

carverman said:


> If I remember correctly, it's the taxable income and not the gross income.
> Depending on your personal deductions and tax credits, you can whittle
> some of it away, .


That's correct, that's what I meant.


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## petea4 (Dec 24, 2010)

What if I'm making 100k/yr over the past 5yrs contributing monies to an rrsp. At year 6 I decide to vacation for 9months and have an income of 25k. If I draw out monies during that year6(20k), will I be taxed based on my year6 income/marginal tax rate?


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## Charlie (May 20, 2011)

your withholdings will be based on how much you take out. Your tax liability will be based on your actual taxable income for the year. Any difference will be refundable or payable when you file your taxes. So effectively, youll pay tax at your Y6 marginal rate.


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## cardhu (May 26, 2009)

Sampson ... sure, the OP is concerned that withdrawals will be taxed heavily ... that is precisely my point ... they’re usually not, and there’s nothing in the initial post that explains why this case is different ... all we really know is that an RRSP exists ... thus my question “lower than what?” ... without knowing more details, its impossible to suggest what might be the most appropriate course of action for OP. 

Carverman ... the level of income at which the surtax kicks in is variable ... these $66514 and $78361 thresholds are widely reported, but they apply ONLY in a very narrow set of hypothetical circumstances, which in the real world apply to very few people ... the amount of taxable income that triggers the surtax is usually higher, sometimes a LOT higher, depending on circumstances and composition of income ... the threshold is different for every person, and there are too many variables to nail down a specific number, which is why the tax tables always default to the lowest possible trigger. 

The surtax is no big deal, really ... there’s nothing sinister about it at all ... every province has a progressive tax schedule, they just all go about it in different ways ... and if you’re earning $80k in Ontario, you’re still paying less income tax than you would in 8 of the other provinces, even with the surtax ... the only province with lower income taxes than ON, for an $80k earner, is BC ... (assuming single person with basic credit only). 

BTW ... in most of the country, the highest tax bracket begins at just shy of $130k .... an income of $66-78K is a lower-middle bracket.


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## carverman (Nov 8, 2010)

cardhu said:


> The surtax is no big deal, really ... there’s nothing sinister about it at all ... every province has a progressive tax schedule, they just all go about it in different ways ... and if you’re earning $80k in Ontario, you’re still paying less income tax than you would in 8 of the other provinces, even with the surtax ... the only province with lower income taxes than ON, for an $80k earner, is BC ... (assuming single person with basic credit only).


Thanks CARHU, didn't know that. I was taxed as a single person, with
child support (not tax deduction) and spousal support. At least the spousal
support (12K per year) brought down my taxable income by $12K plus any
personal deductions at the time. I don't have hard copy of the tax returns
for those years anymore, because I only save the last 7 years as required
by CRA. I do remember that the $25 or 30K withdrawal (even with the 20%
withholding tax) pushed my income for a couple of years into the 81K to 127K
tax rate, because even with my personal exemptions and alimony deductions,
I was well over 80K in taxable income for a couple of years while I liquidated
my RRSP to pay off my mortgage before retirement. 



> BTW ... in most of the country, the highest tax bracket begins at just shy of $130k .... an income of $66-78K is a lower-middle bracket.


Yes, I see that based on my 2010 T1 Special, Federal tax sheet.
$40, 970 or less (which is my current tax rate) is 15%.
40K+ but less than 81,941 is the next mid income level at 22%
81,941 to $127,021 is the next level at 26%
and above 127K , it's at 29% 

and that's only the federal

add to that the Ontario tax (5.05% or 9.15% or 11.16%) then the progressive
tax system really adds up, especially when one is paying sizeable support
payments, in my case about 31% of my gross salary back in those years. 

I think for a couple of years those big RRSP withdrawals still pushed me
into the 26%/11.16% tax bracket, when I would normally be at the 22%/9.15% level...and basically living on half an aftertax salary after child support +spousal support of $25K per year were garnished from my after tax income.


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## warp (Sep 4, 2010)

I dont know how old you are...but heres a plan if you are close to 65...

An RRSP must be converted into a RRIF at age 71....

At age 65 to age 71....( thats 7 years inclusive).....convert $14,0000 from your RRSP into a RRIF...then take out $2000 a year from your RRIF.

There is a federal tax deduction of up to $2000 a year for income from a RRIF, ( and other pension income),,at age 65 and over.......BUT NOT from an RRSP or from CPP and OAS payments

There is also a provincial deduction, making this $2000 income almost tax free.

This is well worth doing for any other people on this board.
And DO NOT let your Bank rep tell you that you can't do this, as has happened to friends of mine.....they dont know what they are talking about half the time.


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## AMABILE (Apr 3, 2009)

Warp, yes that's great info you have provided
and I'm planning on doing that......however
what to do with the money that is over $14,000 ?


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## warp (Sep 4, 2010)

AMABILE said:


> Warp, yes that's great info you have provided
> and I'm planning on doing that......however
> what to do with the money that is over $14,000 ?


As far as I know you do not have to convert your entire RRSP into a RRIF until age 71....( you also have tthe option of buying an annuity, but with interest rates so low now, thats prob not worth doing)

Again, as far as I know you can and will convert PART ( eg, $14,000) , from your RRSP into a RRIF at age 65 to take advantage of the tax deduction availiable.
The remaining funds can stay in your RRSP until age 71.

Remember that once you open a RRIF there will be minimum amounts that you MUST withdraw each year by law, but with only $ 14,000 in your RRIF this minimum withdrawl amount will be small, and you intend to withdraw $2000 a year anyway, so there's no problem there.

Good luck


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## Karen (Jul 24, 2010)

Judging by conversations with friends, it seems to me that many people don't realize that, while it's true that we have to convert our RRSPs to RRIFs by age 71, we don't actually have to draw on the RRIF until any time before the end of the following year. That can make a significant difference in some cases. In my case, I don't expect to need the funds to live on, and I also expect to lose most my OAS when I start collecting from my RRIF. So by delaying drawing on the RRIF until the end of the year I'm 72, I will remain eligible for the part of my OAS that I receive now - which will mean an extra $4300 in my pocket for that year and also some for the year I turn 71.


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## RedRose (Aug 2, 2011)

Does anyone know the percentages one has to withdraw each year?
I heard at 63 it is 4% from RRSP's and 71yrs is 7%, not sure what the required withdrawals would be on RRIFs.
Then, I guess its a juggle between income stream and tax implications.
Keeping the income under 65K I believe prevents the OAS clawback but you still pay income tax so it may be eaten up that way too.
I am just learning as I go from all of you. Thanks for sharing these situations.


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## andrewf (Mar 1, 2010)

Here is the reference table from taxtips.ca. You don't have to withdraw anything from an RRSP until you have to convert to RRIF at 71. If you convert to a RRIF before 71, you have to withdraw at least 1/(90-age) of your RRIF per year. So at 63 that would be 3.7%.


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## RedRose (Aug 2, 2011)

Thank YOU Andrew for this valuable link of info.


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## steve41 (Apr 18, 2009)

The (1/(90-age)) factor doesn't apply above age 70. For ages >70 there are tables for RRIF withdrawals.

71 7.38%
72 7.48%
73 7.59% 
74 7.71%

etc up to

93 17.92%
94 and beyond is 20%


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