# Question Regarding RRSP Withdrawal Rate



## A Voice of Reason (Feb 23, 2011)

My current situation is as follows:

My wife is currently on Maternity leave, receiving EI(approximately 940 biweekly). She returns to work in December. We are looking at buying a home, and I was hoping to get some advice on the best way to proceed with our RRSPs.

My wife has around 16K in her RRSP I have around 22K in mine. If we do find a home we like, I plan on using the home buyers plan with the amount in my RRSP.

We both a FT provincial employees with pension plans, so I’m tempted to say I would rather have the money out of the RRSP (these contributions were made before we started working FT). 

I have 2 questions. 

1)	To ensure I understand how the withholding tax works, if she takes the money out of the RRSP, there will be an initial amount of 15% ($2400) for withholding tax taken , and I will probably be on the hook for another 5% ($800) come tax time, as I roughly calculate her effective tax rate will be 20% for the 2014 tax year. I will not pay any more than this amount, correct? (This is where I’m not sure if I understand the withdrawal rules around RRSPs correctly.)


2)	Assuming I’m correct so far, which way would you proceed?

-Withdraw the money from the RRSP, pay the tax, apply it to the down payment, (for a net of $12800)

-Use the Home Buyers Plan to put the full 16K towards the down payment but then re-contribute the amount to her RRSP over the next 15 years

Thanks to anyone who can help out.


----------



## Eclectic12 (Oct 20, 2010)

If withdrawn for the HBP, there will be nothing withheld with the ongoing responsibility to repay at least the minimum. 
As I understand it, if the minimum is not repaid, then that amount is added as income in the year it should have been paid.


The withholding tax comes into play if you aren't using the HBP plan. 
It is similar to when an employer withholds taxes on employment income and is on a scale based on the lump sum.
http://www.taxtips.ca/rrsp/withholdingtax.htm

With $16K being over the $15K threshold, the withholding tax will be 30% x $16K, which is $4800.


If you really think she will end up after all income sources, all deductions, all credits on her tax return paying 20%, then likely two separate RRSP withdrawals of between $5001 and $15000 is likely the better route to go. This will set the withholding tax at 20% for each withdrawal.



Deciding which is better between a taxable RRSP withdrawal and the HBP likely will depend on what assumptions you are making for retirement. 

One thing to consider is that if you plan on retiring before OAS kicks in and you have the option to delay taking your pension - there could be a window to withdraw from the RRSP while being able to control income levels. This may mean the RRSP give the chance to get a refund at a higher rate and pay the income tax at the withdrawal at a lower rate.


Cheers

*PS*

Bear in mind that there are a couple of variables to work out before you can be confident in the 20% income tax figure. 
What's the tax implications of her maturity leave?
Have you calculated that she has to add the $16k withdrawal as income, on top of whatever her current taxable income is?


----------



## leslie (May 25, 2009)

Trade off of factors.
1) KISS would say simply collapse the RRSP and be done with it. It is not a huge amount so it will never have any big impact in retirement. I agree with Electric's points about including the w/d in your estimate of her tax rate this year, and breaking the w/d into two.

2) Using the HBP allows you to access a greater $$ which supposedly will reduce the mortgage you would otherwise have. But the result of the HBP is a second mortgage you will have to fund, at the same time you have a new child, and when ownership cash flows probably are larger than your renting costs. Because repayments are in after-tax dollars it will be harder to repay than it was to originally save. And will the HBP actually reduce your mortgage?? -- or will it simply result in your buying more house than you would have otherwise. On balance I am no fan of the HBP.

3) I agree with the OP that having an RRSP when you expect a cushy gov pension is probably the wrong move. But Electric's point is a good one about being able to delay the pension and cash out a small RRSP in the interim a low rates. For myself I would not consider the difference in w/d rates between the choices (maximum 20%) to be worth maintaining the account for another 30 years. KISS.


----------



## cashinstinct (Apr 4, 2009)

For the gov pension / RRSP debate, my point of view: You cannot know if you will keep your job till your retire.

I don't want to avoid RRSP only because I might keep my gov job till I retire...

I don't see why someone would "burn" RRSP room forever. I am no fan of HBP, but I would not pay tax now for a downpayment...


----------



## domelight (Oct 12, 2012)

A Voice of Reason said:


> My current situation is as follows:
> 
> My wife is currently on Maternity leave, receiving EI(approximately 940 biweekly). She returns to work in December. We are looking at buying a home, and I was hoping to get some advice on the best way to proceed with our RRSPs.
> 
> ...



RRSP withholding tax is as follows. This is based on a calendar year, so you can't circumvent the rate by taking out 5K at a time.

Up to 5,000 = 10%
5k- 15k = 20%
15k > = 30%

What you will pay in the end depends on your wife's tax bracket. So lets really think this through for a moment I can think of two good reasons why HBP is probably better.

1. Assuming a low 20% tax bracket now. means you pay 3,200 in tax on the 16k withdrawl. So now lets say that's 3,200 less in principal owing on your mortgage.
--$3,200.00 x 3.5% (annual average mortgage interest) x 25 years (average life of mortgage) = $ 2,800 less in interest you pay to the bank.
--Now lets say you cash out the 16k in rrsp's when you retire and assume a 30% tax bracket. = $ 4,800
--so 4,800 in tax at middle bracket later which potentially saves 2,800 in bank interest. or 3,200 in tax now.

2. HBP will not affect your child tax credits. Withdrawing RRSP's will. Assuming this affects you the math is 2% of 16,000 = $ 320.00



This is really nickel & dime stuff. What is your personal comfort Zone ? Myself as an individual I would take the HBP and then let CRA assess the amount as income each year as opposed to physically repaying the HBP.


----------



## Eclectic12 (Oct 20, 2010)

domelight said:


> ... This is based on a calendar year, so you can't circumvent the rate by taking out 5K at a time.


I'm not sure it is calendar based as there are a lot of references such as:


> Obviously there is a benefit to keeping your individual withdrawls to $5,000 or less. You will pay less in withholding tax.


http://canadianfinanceblog.com/withholding-tax-on-rrsp-withdrawals/

It is not clear and could be changing as this tax resource site notes that:


> Also note that some financial institutions are looking at clients who have made multiple RRSP withdrawals and may require the higher withholding rate be applied!


http://blog.taxresource.ca/cash-out-your-rrsp-and-pay-down-debt/


If the RRSP withdrawal is looking attractive, it's probably a good point to confirm with the financial institution and CRA.

Cheers


----------



## A Voice of Reason (Feb 23, 2011)

Domelight you are right about the nickel and dime part. I think my greater concern lay in the idea that I was interpreting the withdrawal rules incorrectly and was going to run into a large unexpected surprise come tax time. What has been driven home by everyone's posts is I need to come up with an accurate as opposed to ballpark figure of my wifes income for this year. 

I understand a lot of people's disdain for the HBP.. robbing Peter to pay Paul is not generally a good financial plan. (Especially when Peter is your retirement.) I currently also have around 22K in RRSPs. Before this post I was counting neither my wife's nor my own RRSP amounts in our DP. Assuming I do the smart thing, and don't simply figure now I can buy 35K more house, I think it will make sense to, at the very least use my amount via the HBP. The pension is what is driving my line of thinking. 

Thanks for everyone's very useful input.


----------



## peterk (May 16, 2010)

domelight said:


> Myself as an individual I would take the HBP and then let CRA assess the amount as income each year as opposed to physically repaying the HBP.


If you insist on cashing out the RRSP because of wanting to not having this tax burden at retirement, then at least do it this way as domelight has suggested. Then you have no withholding tax and the income is added in small increments over the years.

I would use the HBP and repay it, to continue taking advantage of the tax free growth, personally.


----------



## domelight (Oct 12, 2012)

A Voice of Reason said:


> Domelight you are right about the nickel and dime part. I think my greater concern lay in the idea that I was interpreting the withdrawal rules incorrectly and was going to run into a large unexpected surprise come tax time. What has been driven home by everyone's posts is I need to come up with an accurate as opposed to ballpark figure of my wifes income for this year.
> 
> I understand a lot of people's disdain for the HBP.. robbing Peter to pay Paul is not generally a good financial plan. (Especially when Peter is your retirement.) I currently also have around 22K in RRSPs. Before this post I was counting neither my wife's nor my own RRSP amounts in our DP. Assuming I do the smart thing, and don't simply figure now I can buy 35K more house, I think it will make sense to, at the very least use my amount via the HBP. The pension is what is driving my line of thinking.
> 
> Thanks for everyone's very useful input.


 In conclusion If you wish to repay the RRSP that is your call. Personally this is my view and what I practice.

1. instead of buying RRSP's I make extra payments on my mortgage and expect it to be paid off in 15 years. I will then continue to make my mortgage pymt to my own retirement for the next ten.
2. my reason for this is the extra mrtg payment is a guaranteed "Tax Free" rate of return on my money. (at mortgage interest rate x number of years saved x my tax bracket (because I will pay tax on my rrsp withdrawl but I wont pay tax on bank interest I saved))
3. As an accountant the bulk of my clients all say their RRSP's are worth what they put in themselves over the long term 10 years and more. (In the long run they made nothing) The days of 80's & 90's interest rates and investment return are gone. 
4. In my experience unless you have bare minimum half million dollar portfolio, or get lucky investing yourself. It is very rare to find a financial advisor that will get you consistent annual growth over the long term.
5. Will my approach keep the most cash in ,my pocket in the long run ??? All I see is a guaranteed rate of return of least 5% after factoring the tax, it's probably higher because you would be fortunate to get 3.5% mortgage rate for the entire duration of your mortgage. It's usually higher in the beginning when you have the highest principal

Whether or not you cash your wife's rsp (as opposed to HBP) it's reasonable to assume she will owe 20% on the withdrawl at year end. (regardless of withholding tax at source, assuming her annual income is under 42K)

With regards to Electric12's follow up the withholding rates are correct however consider 2 things.

1. if you withdrawl 5k at Edward jones (for example) and another 5k at TD waterhouse. Then yes each will only withhold 10%
2. If you cash 5k in Feb. at Edward Jones they will withhold 10%. However if you cash another 5K at Edward Jones again in June of same calendar year then not only will they withhold the required 20%, They will also deduct the extra 10% to reconcile for the first 5k in Feb.


----------



## Eclectic12 (Oct 20, 2010)

peterk said:


> domelight said:
> 
> 
> > ... Myself as an individual I would take the HBP and then let CRA assess the amount as income each year as opposed to physically repaying the HBP.
> ...



I must be missing something ... I see a lot of risk to this plan.
On the plus side, no withholding tax plus delay before the repayments is going help (i.e. withdraw in 2014, repayment started in 2016).

On the risk side - is it reasonable to expect taxable income that drives the income tax rate to:

1) be in the same tax range when working full time as when one was on maturity leave for a good chunk of the year?

2) *also* stay at the same level from 2016 thru 2031 as the year with the maturity leave?

and finally,

3) the tax rates stay the same for fifteen years?


That seems like more risk than I'd want to take on.


Cheers


----------



## domelight (Oct 12, 2012)

Eclectic12 said:


> I must be missing something ... I see a lot of risk to this plan.
> On the plus side, no withholding tax plus delay before the repayments is going help (i.e. withdraw in 2014, repayment started in 2016).
> 
> On the risk side - is it reasonable to expect taxable income that drives the income tax rate to:
> ...


 Electric12
All very good points. My stradedgy for me. Meets my comfort level and also in my view leaves the greatest amount of flexibility for amendment. Is it the best in the long run, I don't really know. But early in my mortgage it reaps a guaranteed rate of return. Which in my comfort zone (as opposed to waking up tomorrow and my investments tank or experience no growth) I am only 40 and have lots of time to adjust my plan, based on future mrtg renewal rates, investment returns, and tax rates.
I completely agree that the fact I put no weight in long term RRSP growth is a major factor in my decisions. However if you do the math you will definitely end up with more principal in your retirement fund by proceeding this way. In my case I will never know whether I lost in the long term due to RRSP investment growth. But I prefer to deal with the certantity
This is simply how I choose to proceed based on my tax knowledge. additionally my plan is flexible and I will likely adjust it the closer I get to paying my mortgage off. As a footnote I am in a higher tax bracket now then where I will be when I retire, but I believe that in the first 15 years of mortgage every extra dollar should be applied to my mortgage as opposed to my RRSP's 
Everybody's situation is individual and should be planned for as such, my comments are simply a consideration that many people do not factor.

Cheers,


----------



## Eclectic12 (Oct 20, 2010)

domelight said:


> ... All very good points.
> My stradedgy for me. Meets my comfort level and also in my view leaves the greatest amount of flexibility for amendment...


 ... and that's where the OP should make sure to have factored in any different in income level when the plans for his wife's RRSP are considered.




domelight said:


> ... But early in my mortgage it reaps a guaranteed rate of return.
> Which in my comfort zone (as opposed to waking up tomorrow and my investments tank or experience no growth) I am only 40 and have lots of time to adjust my plan, based on future mrtg renewal rates, investment returns, and tax rates.


Watching people over the years says that some of the other factors that most people overlook is what their level of expertise is, what time is available and what opportunities are seen.




domelight said:


> ... I completely agree that the fact I put no weight in long term RRSP growth is a major factor in my decisions ...


Which I find strange as I've met many people who have made bad choices that have caused problems to their RRSP value or who later realised they'd earned less than they could have by paying high fees for little value ... but have difficulty thinking of one who was obstinate enough or making so many bad decisions to end up in a loss position over ten years or more (i.e. value < contributions put in).




domelight said:


> ... However if you do the math you will definitely end up with more principal in your retirement fund by proceeding this way. In my case I will never know whether I lost in the long term due to RRSP investment growth.
> 
> But I prefer to deal with the certantity ...


And if that suits where you are today - it is perfectly suitable. 
Particularly, if you know yourself well enough to know that investing is going to lose money for you. 

The challenge is to identify if/when there's another variable that could change the picture (ex. a potentially much lower income that would facilitate lump sum withdrawals from the RRSP).


In my case, having lived through several downturns - March 2009 was an opportunity based on what I was seeing, the HELOC I had in place and what I had experience with. I acted on it in two ways. 

The first was to borrow against my HELOC, where of the fifteen stocks bought, one was sold when down 30%, one down for 10% and the reminder gained between 80% and 207% capital gains. All paid dividends or cash distributions of 6% to 30%. About 50% of these were liquidated to pay off the mortgage early.

[I really liked the 207% CG as it took longer to re-start paying the cash distributions than I expected but by the time I sold, the cash distributions had repaid 46% of the purchase cost.]


At the same time, cash was contributed to my RRSP where the more conservative choices gained 80% to 150%, which paying dividends or cash distributions of 6% to 10%.

It also didn't hurt in my RRSP, I'd watched Agrium climb from my purchase price of $26 / share to $111. So when it started sliding, I sold two thirds for $109 and then bought back for $46 or so.




domelight said:


> ... Everybody's situation is individual and should be planned for as such, my comments are simply a consideration that many people do not factor.


Agreed ... my comment is intended to indicate in the OP's wife situation, taxable income levels now and for the next sixteen years are an important factor before deciding.


I've seen people with all sorts of regrets when they have based their action on one set of factors when their situation had additional factors.


Cheers


----------

