# Rock or Hard Place? Cash out RRSP or not?



## noodles (Apr 8, 2014)

The question is simple: Should I take all or part of my $100K RRSP received as severance as cash, to pay down debt, and incur the tax hit. 

Facts
- single male, 63
- no children
- retired 2013 

Income
- receiving pension of $58,000/yr through age 64
- at age 65 CPP bridging sends, reducing pension to $48,000
- took early CPP : receiving $8700/yr now
- total income monthly $3938 (pension)+721(CPP)

Severance
- severance = $96,000 of which $34,000 was retiring allowance
- have 2013 RRSP contribution room of $66,000
- entire severance was placed into a temporary RRSP GIC which comes due for renewal or cash out April 24 2014

Assets
- principal residence value approx. $1.1M.
- $15,000 in stocks
- chequing account $10,177 (need to maintain $5K for no bank fees)
- savings account $1,500 cash
- the RRSP GICs a few dollars over $100,000

Liabilities
- principal residence mortgage $255,500 payments $740/bi-weekly
- secured Line of credit(a) @ 4% (prime+1), balance $176,269
- secured Line of credit(b) @ 3% fixed, balance $36,000
- monthly payments (P&I) on servicing LOC(a)&(b) is $873/mo
- no credit card debt
- no car payments
- no cell contract
- fixed bills not too bad
- hydro about $105/mo
- water ~$90/3 mo
- gas ~$105 equal billing
- tv/cell/homephone/internet/netflix $160 mo
- pet insc $38


The question is whether I should be banking the entire RRSP for future use, or should I take the tax hit of cashing out the $100K severance, or any part of it, to pay down the LOC balance of $200K to reduce the cost of servicing that debt? The pension is defined benefit, indexed to inflation. I will be downsizing my home and freeing up assets once an elderly parent living with me has passed, but that person being 93 and strong, this is a future plan only.

I will value your input. Thanks.


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## Ponderling (Mar 1, 2013)

This might be a troll, but if you are real, how do you plan to deal with discharging debts worth about half of the purported value of your house now that you are retired? 

You got the severance a year ago, and it comes due next week or so and only now you are starting to think about it? 

You have to get your head out of the sand in many ways. 

I would look to try to sell the house for a bit less than 995K, and moving to rent somewhere once you are in a position to move if that happens within a couple of more years.
If you go for over 1M you might be waiting for a reallllly long time to flog it in the current market. 

Discharge you debts from the proceeds, get as much money at work in modest growth equities inside a TFSA, and get the rest into solid dividend paying stocks.

Work on drawing as much as you can from the RRSP every year until you are 71, without bumping yourself into a marginally higher tax rate or you are gonna get walloped with tax at 71. Use the withdrawls to pay down the LOC's until then.

How did you end up so far in hock? If it is spending beyond your means, things are going to get tougher down your road.
So start making some real adjustments to get spending under income or you might not need pet insurance, you might need that money to buy yourself cat food.


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## Charlie (May 20, 2011)

this is more a lifestyle than a financial decision.

You're overhoused, as you note. $100K RRSP, after tax, won't make a significant dent in your debt.

So can you comfortably afford $2400/mo debt service costs for the next several yrs on your current pensions? Is living in your current house worth this to you? With the numbers provided I think it would be tight -- but that's a calculation only you can make.

When your parent is no longer living with you, you should downsize, pay off debts and look at your housing needs. Before then -- it would certainly make financial sense, but there may be other factors at play.

I agree with Ponder that you should draw down your RRSP at increments to the next tax bracket. I wouldn't worry too much about age 71 given your income level and RRSP balance as it's unlikely you'll be in too high a bracket or even in the OAS clawback range at that point even with mandatory RRIF withdrawals. And I also agree with Ponder about making sure your spending is in line with your new income.


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## OptsyEagle (Nov 29, 2009)

It will be the same amount of tax payable if you take it all in cash or you put it into the RRSP and withdraw it all, so I would do the following:

Put it into the RRSP and try to take out only the amount that keeps your income below the next bracket. In other words if you keep your total annual income below $80K (for Ontario) you will stay within the 31% tax bracket. Go above that and you will pay about 43% tax. That is a 12% savings. Take it all in cash and some will be taxed at even 46%. Even if you have to keep the debts for one or two years longer, it will be worth it. In the first year, I would separate enough to keep your total income below $80K and take that in cash and put the rest in the RSP to save contribution room for possible future use (instead of putting it all in the RSP and immediately withdrawing the amount that puts your income at $80K).

At your income level it would appear you will never have an opportunity to pay less then 31% tax so you might as well take the amount that is taxed at that level now. Deferring the tax is not as useful at age 63 as it is at age 33.


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## steve41 (Apr 18, 2009)

Your effective tax rate after a few years (when you downsize) will be 20%. Prior to that it is approx 25%. Your problem is the house. Even if you downsized in 3 years by $500K, you will still have a $1M estate, with no one except the SPCA to benefit.


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## OptsyEagle (Nov 29, 2009)

steve41 said:


> Your effective tax rate after a few years (when you downsize) will be 20%. Prior to that it is approx 25%.


This guy will never get his hands on that severance money for less then 31% tax. Marginal tax rates are the important rates to him.


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## My Own Advisor (Sep 24, 2012)

Kill the debt.


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## bmoney (Jun 22, 2013)

As others have stated, you have too much debt and too much house for someone your age, but luckily you can service it with your pension. First, unless your netting 6%+ on the stock portfolio, I would use it to retire some debt at 4% (assuming this is the highest interest rate). You could be more aggressive if your comfortable using a LOC as an emergency fund, and retire more debt with about 6k of your savings.

Regarding the RRSP situation, your current annual income is about 58k and 57k next year @ 31% marginal rate. The next bracket up at 71k @ 33% and 80k @ 35%. I would recommend withdrawing up to 22k of RRSPs over the next 4 years to retire the debts.

This will free up some cash flow, but you are still faced with a lifestyle choice that only you can answer. With so much house and debt, are you comfortable living on that income? Maybe you can downsize or work part-time in a reward job (maybe something akin to a hobby).


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## noodles (Apr 8, 2014)

Ponderling said:


> This might be a troll, but if you are real, how do you plan to deal with discharging debts worth about half of the purported value of your house now that you are retired? QUOTE]
> 
> Thanks to everyone who has responded thus far.
> 
> ...


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## noodles (Apr 8, 2014)

To forum participants...

My thinking falls in line with some of the responses I see here today. Specifically, that my stock portfolio is not benefitting me to the extent it is worth keeping at this point in time, and that maximized deductions from the RRSP with a view to keep income within the lower marginal tax rates is a better option than withdrawing it all in one year. 



It sounds like both bmoney and OptsyEagle are making the similar recommendation: withdraw an amount each year that would keep total earnings below the $80K limit and apply that to the highest debt (which is the 4% LOC.) 

With this plan I will have made a severe dent in the debt over four years, and should I regrettably find myself with an inheritance during this period, not all of the RRSP money would be required to be withdrawn. My only concern this year then will be determining the profit on the investments I liquidate so I can withdraw the correct amount for 2014.

I really appreciate this forum and the privilege of being able to bounce a few ideas off such an elite group, and the valued advice they provide in those ideas both in my thread and in others I have read here. Sometimes things are only clearly seen when others have also provided input. Thanks.


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