# Quickly exiting RRSPS...make sense??



## Northof60 (Nov 22, 2010)

This is one of those “I think I know the answer but need to ask anyway” questions. Basically, I think my best course of action for 2014, 15, 16 and 17 is to withdrawal all RRSPs.

Situation

Wife and I are 53/55 and will be retiring this year. We will have a new house with no mortgage, 300K in cash/investments, 50K TFSA, and 170K combined in my and spousal RRSP. 

Our primary income will be 44k each (after income splitting) via an annual allowance (early pension) from defined benefit pension plans.

I stopped putting $ in RRSPs two years ago, but should have stopped sooner.

We will be living in Alberta and the combined federal/provincial tax rate for income between $43561 and $87,123 is 32%

So, no matter what withdrawal strategy I take for the RRSPs (slow or fast), we are going to pay at least 32% on the 170K.

So, my crazy plan is for us to withdraw 30K each in RRSPs in 2014, 2015, and 2016, and pay the 32%.

I suppose we could withdrawal slowly (over 10 years, perhaps) but what would be the advantage in that? Our money would still be growing within the RRSP when it could be growing outside the RSSP, and if it is going to be taxed I don’t want it growing where I am certain to pay no less than 32% tax on it.

Is there any downside or something I am missing with what I plan to do?

Thanks for any suggestions.


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## kcowan (Jul 1, 2010)

The only thing you might want to consider is a delay in receiving the DB pension, and living totally on your RRSPs instead to get the average tax rate down. If you need $88k to live on, it would be gone in 2 years, and your DB pension would be higher for the rest of your lives. Your TFSAs will continue to grow as your lifestyle will be less costly.


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## Charlie (May 20, 2011)

If you don't need the money, you've got almost 20 yrs of potential deferral of tax in the RRSP. Why pay the 32% now? Even if you pay a sightly higher rate on some of it later -- that's 20 yrs out. It's like a $50K interest free loan for 20 yrs. I wouldn't be anxious to prepay it.

As you get closer to 65 you may consider the OAS clawback rules -- but there are 10+ yrs of budgets to change those and lots of indexing along the way. 

The deferral of tax is usually a bigger RRSP benefit than tax rates on withdraw.


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## MoneyGal (Apr 24, 2009)

Charlie said:


> The deferral of tax is usually a bigger RRSP benefit than tax rates on withdraw.


+1


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## Northof60 (Nov 22, 2010)

Thanks everyone

I get the deferral of tax argument, but that also prevents use of the funds.

If I get what you are saying it is to draw down on the non-registered funds for as long as possible and just let the RRSP grow. I'll pay more tax maybe on the RRSPs, but I may actually have more of a gap for lower taxes at the time? 

But, what I don't want to do is put myselfy in a position where RRSP withdrawals or RRIF payments cause me an OAS clawback. Although, it looks like I should be safe from that based on current income required before OAS Clawback.

I guess I should rebuy personal edition of RRIF metric (had it a couple of years ago) and play with different scenerios.

Thanks again everyone


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## Northof60 (Nov 22, 2010)

Charlie said:


> If you don't need the money, you've got almost 20 yrs of potential deferral of tax in the RRSP. Why pay the 32% now? Even if you pay a sightly higher rate on some of it later -- that's 20 yrs out. It's like a $50K interest free loan for 20 yrs. I wouldn't be anxious to prepay it.
> 
> .


Thx Charlie

But then I am paying tax on what could be 300K+ instead of 170K. If I was just deferring the tax on 170K yes, but I am setting myself up to pay taxes (as income) on all that is earned withing the RRSP portfolios. I thought this was one of the most dreaded drawbacks of RRSPs - paying tax as income on not just what you deffered, but everything that was earned within the RRSPs. If I get my money out of RRSPs sooner, then I have a chane to invest in instruments that provide capital gains or dividends, which are taxed at much lower rates.

That was my thinking. bite the bullet now on the 32% but gain freedom for lower taxes on what that money will now earn for me.


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## MoneyGal (Apr 24, 2009)

This is partly a financial math problem, of the kind that is called "time value of money" problems or, for actuaries, part of the general theory of interest rates. 

Even if you pay the same rate of taxes (32%, 43%, or pick any rate) over time, a dollar you pay next year (or in 5, 10 or 15 years) is "worth less" today -- a dollar you must repay today and a dollar you must repay in 5 years do not have the same economic value, although they have the same "face" value.

Thus the capacity to move the payment of a dollar to some point in the future has economic value; even an economic value that can be calculated.


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## MoneyGal (Apr 24, 2009)

Northof60 said:


> Thx Charlie
> 
> But then I am paying tax on what could be 300K+ instead of 170K. If I was just deferring the tax on 170K yes, but I am setting myself up to pay taxes (as income) on all that is earned withing the RRSP portfolios. I thought this was one of the most dreaded drawbacks of RRSPs - paying tax as income on not just what you deffered, but everything that was earned within the RRSPs. If I get my money out of RRSPs sooner, then I have a chane to invest in instruments that provide capital gains or dividends, which are taxed at much lower rates.
> 
> That was my thinking. bite the bullet now on the 32% but gain freedom for lower taxes on what that money will now earn for me.


And this is what you would weigh if you are going to analyze this problem like a student of quant finance would:

In what circumstances am I better off if I withdraw the money today and pay 32% and then invest in tax-preferred instruments, versus keeping the funds invested and drawing down over time, paying 32% on each withdrawal? 

There are multiple variables and you will need to make multiple assumptions. However, if you are interested in modelling this problem mathematically this is a basic personal finance problem invoking the rules of the time value of money.


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## Charlie (May 20, 2011)

Most of the models I've seen still favour RRSPs even though income does not get the beneficial investment tax rates. A few reasons:

1) You've got that extra $50K deferred tax earning income. (You've got 40% more capital since your $170K did not get reduced to $120K).
2) That tax is also deferred 20+ yrs -- remember, your RRIF will continue to defer well beyond your 70th year. If you or your spouse live to 90 some of it will be deferred 40 yrs.
3) You would otherwise pay some tax every year, and you may not have control on when income is triggered -- sometimes a stock takeover will trigger a gain in a year you did not anticipate. Investment gains are typically not linear. And your investment decisions may be tainted by tax concerns. Too costly to diversify from Nortel/Rimm.
4) Those preferential investment tax rates are at the whim of the government. Not too long ago cap gains went to 75% on their way to 100%. Maybe they go up. Maybe they go down.

Just pointing out that the pitfalls you note, are not necessarily pitfalls at all. If the world unfolds one way you may be best collapsing them in the short term. But there are many more ways where this may not be the case.


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## Charlie (May 20, 2011)

Just for giggles, here are some numbers:

Keep the RRSP:
Capital $170K
return 5%
years 20.

future value: $451K
tax at 39%: (176K)
net $275K

Draw down:

Capital $120K
return: 5% less 15% tax rate (half of your current 30%)
years: 20

Future value (tax paid): $276K

This was a fluke! 

But if your ongoing investment gains are all taxed at 50% of your current marginal rate, and you fully collapse the RRSP in 20 yrs and are fully taxed at the top Alberta marginal rate you would be dead even at a 5% return. Higher tax on your invest income, or keeping your RRIF/RRSP beyond age 70 puts the edge to the RRSP. And the RRSP would certainly not be all taxed at the top rate (you'd need other income of $130K each (increased for indexing) before this happened).

This is based on my off the cuff assumptions. Just to demonstrate a point. You could play around with different investment returns, or a different drawdown period but, generally, over 20+ yrs the RRSP is not necessarily punitive.


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## peterk (May 16, 2010)

This seems like a scenario with no "right" answer. The only thing you can do is fully crunch your own numbers with multiple fluctuating variables for growth, tax rate, inflation, clawbacks, withdrawal time-frame etc. play with the numbers, figure out which scenarios are most likely with the info you have, and go with it.


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## Northof60 (Nov 22, 2010)

Thanks Charlie and MoneyGal (and kcowan and peterk as well).

I really appreciate the time taken to help me weigh options. I will play with some scenerios and figure out what to do. 

I guess this turned out to a more interesting question than I first thought...lol


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## steve41 (Apr 18, 2009)

Pull down the RRIFmetic demo. This is what the program does.... incorporate income tax over time. It almost always turns out that to shelter your RRSP makes the most sense. The exception is if you have a terminal illness and don't expect to make it past 70 (say). For the normal retirement plan..... shelter.


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## Northof60 (Nov 22, 2010)

Thx. I bought it two years ago and it helped me plan for retirement. Great product. Really powerful. I lost it with a computer problem but will rebuy newest personal edition. Going to wait until we move in June though, because if I get into that program again I'll never put it down....lol. The whole planning forward thing will be a late fall project when we are settled in new house and city and have a better hand on all actual expenses (as opposed to some that are estimated).


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## kcowan (Jul 1, 2010)

I am willing to bet that, if you can prove you purchased it, you can get it again gratis. Steve is a reasonable man.


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## Northof60 (Nov 22, 2010)

kcowan said:


> I am willing to bet that, if you can prove you purchased it, you can get it again gratis. Steve is a reasonable man.


 I have April 2011 Visa statement that I could scan.


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## steve41 (Apr 18, 2009)

Northof60 said:


> I have April 2011 Visa statement that I could scan.


OK...... I can upgrade your original (or last) renewal gratis. Email me ( steve at fimetrics.com )

Steve


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## pacman (Sep 6, 2009)

Another endorsement for Steve and RRIFmetic. Very good program


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