# WIthdrawing RRSPs when income is zero?



## bumblebee (Jan 15, 2015)

Asking for a client...
He is 35, lives alone, no children, very frugal lifestyle.

Since late December 2017 my client has been on work leave because of a disability. His insurance company pays him monthly disability payments which are non-taxable and comfortably allow him to pay the bills. Because the payments are non-taxable, he will have no income in 2018. He has a half decent amount of $$$ in RRSPs and zero in his TFSA. So...

Would it be advisable for him to withdraw funds from his RRSP, pay the tax (very little given his income) and then plop that money into his TFSA?


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## Jimmy (May 19, 2017)

It may be better to just pay the tax. You don't recover the RRSP room which is more valuable when you are working and in a higher tax bracket. When he is working the marginal tax savings could be up to 53% in ON vs 20% at the lowest income rate for ex.

Sorry disregard. I thought he was wdrawing $ to reduce tax payable. You were talking about the wholding tax on the RRSP wdrawal itself.


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## OnlyMyOpinion (Sep 1, 2013)

I can understand why a person might say 'yes'. 
But first I'd ask, "what is the overall plan here"? Will this person be on LTD for an extended period, shifting from RRSP to TFSA over a number of years and paying *no* additional taxes on the RRSP withdrawls so they have more tax-efficient savings for the future? 
Because one wonders why there is zero in his TFSA. If he is going to w/d from the RRSP and ultimately just fritter the money away out of his TFSA then there is no long term plan and the shift may be doing him no favours.
You mention 'very little' taxes - have you run the actual numbers - it may not be worthwhile.


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## OptsyEagle (Nov 29, 2009)

It is a no brainer. Yes, withdraw from the RRSP and deposit it into the TFSA. I would withdraw it to the maximum of his personal exemption (around $12,000). He will be charged withholding tax but will get it all back if what you say is true about zero taxable income. You could break it up into multiple withdrawals to reduce this temporary tax charge.

Not trying be overly critical but if this client is a financial advice client and you could not answer this question at the time of your meeting AND you have been in the business more then 1 year, you should really think about the value you bring to your clients. That question was actually easy to answer, if you have the most basic understanding of how a person is taxed and how an RRSP and TFSA work. You have obviously figured out that an opportunity was there, so koodos for that, but you should not have had to come to an internet website to confirm it.

If you are a Financial Advisor, I am not saying that you should look into another line of work. I am saying you need to brush up on Canadian taxation rules, among other things, if you are going to provide value added service to your clients. Sales skill will help you, but only knowledge and expertise can add value to your clients financial lives.


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## james4beach (Nov 15, 2012)

If the person is at any risk of declaring bankruptcy (and someone with disability problems may well be), there is value in keeping funds inside the RRSP due to bankruptcy/creditor protection: https://business.financialpost.com/...editors-will-never-be-able-to-grab-your-money



> “From my prospective of what I see as a trustee, I would put money into my RRSP before I put it in my TFSA,” says Andy Fisher, a trustee in bankruptcy with A. Farber & Partners. “I just see things from a worst case scenario and try to structure from there. I know that’s a little bit negative. I see the protection of the RRSP beating any tax benefits.”


Losing some tax efficiency is bad. Losing all your savings in bankruptcy (when it could have been shielded inside an RRSP) is much, much worse.

I have similar thoughts for small business owners and others who may be exposed to lawsuits. I'm warming up to the RRSP myself due to this creditor protection... there's more to it than just taxes.


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## OnlyMyOpinion (Sep 1, 2013)

james4beach said:


> ... there's more to it than just taxes.


Agree. The OP already knew the simplistic answer, so what else might be going on in this person's life?

I'm about to have someone open and max out a TFSA. They sound similar this person, but are older. They've already gone through the bankrupcy part however and will never have a house and mortgage again. So I'm hopeful the TFSA will persist and provide some much-needed monthly income.


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## Onagoth (May 12, 2017)

bumblebee said:


> Asking for a client...
> He is 35, lives alone, no children, very frugal lifestyle.
> 
> Since late December 2017 my client has been on work leave because of a disability. His insurance company pays him monthly disability payments which are non-taxable and comfortably allow him to pay the bills. Because the payments are non-taxable, he will have no income in 2018. He has a half decent amount of $$$ in RRSPs and zero in his TFSA. So...
> ...


Are they also receiving CPP disability?....IIRC that is taxable and it doesn't always occur to people since they don't withhold (unless you ask)


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## coghlan (Nov 8, 2009)

The only downside I see is that the person loses the opportunity to have both RRSP and TFSA funds growing tax-free, but that assumes that the person might one day have additional funds to put in the TFSA.


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## bumblebee (Jan 15, 2015)

OptsyEagle said:


> It is a no brainer. Yes, withdraw from the RRSP and deposit it into the TFSA. I would withdraw it to the maximum of his personal exemption (around $12,000). He will be charged withholding tax but will get it all back if what you say is true about zero taxable income. You could break it up into multiple withdrawals to reduce this temporary tax charge.
> 
> Not trying be overly critical but if this client is a financial advice client and you could not answer this question at the time of your meeting AND you have been in the business more then 1 year, you should really think about the value you bring to your clients. That question was actually easy to answer, if you have the most basic understanding of how a person is taxed and how an RRSP and TFSA work. You have obviously figured out that an opportunity was there, so koodos for that, but you should not have had to come to an internet website to confirm it.
> 
> If you are a Financial Advisor, I am not saying that you should look into another line of work. I am saying you need to brush up on Canadian taxation rules, among other things, if you are going to provide value added service to your clients. Sales skill will help you, but only knowledge and expertise can add value to your clients financial lives.


No worries - I'm definitely not a financial guy. I use 'client' in the respect that I handle his IT needs 

No CPP disability.
LTD is expected to last until mid 2019 at which point he will return to work full time.
No risk of bankruptcy.


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## OnlyMyOpinion (Sep 1, 2013)

So this is IT advice, not financial advice? 
BTW, what did the client intend their RRSP to be for, and what do they intend their TFSA to be for - once they've made a one-time raid of it? 
In removing funds from their RRSP will they have to sell and lock-in a loss - given the market's current swoon?


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## bumblebee (Jan 15, 2015)

RRSP and TFSA will both be used for retirement. No other short term plans.
RRSP contributions are ~70k, present value ~120k, so no losses even with the recent market downturn


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## gardner (Feb 13, 2014)

Does the client qualify for the DTC and an RDSP? The RDSP could shelter $200K from taxes. DTC would soften the tax burden on the RRSP withdrawal. Not sure about RDSP vs. bankruptcy.


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## OptsyEagle (Nov 29, 2009)

It's a no brainer. Money inside the two respective plans are treated almost identical except perhaps withholding tax on foreign dividends that get rendered in the TFSA but not the RRSP.

Anyway, the big difference is that later your client will be able to withdraw money from the TFSA completely free of tax, whereas in the RRSP that is rarely the case. If you have an opportunity now to remove some without tax and you have TFSA contribution room that you had no plan to use in the near future, then do it.

For the amount, you want to look closely to see if there are any other taxable incomes and subtract that from around $12,000 and that remainder amount should be removed from the RRSP and put into the TFSA. The only irritant is withholding tax on the RRSP. Irregardless of what a persons taxable income is, the financial institutions that hold RRSPs are required by regulation to withhold tax upon withdrawals. It varies from Province to Province so look it up. Your client could withdraw this amount in multiple withdrawals to try to reduce this temporary burden. Temporary in the fact that any withholding tax paid will be returned to him 100% if his taxable income is close to 0. So if the client wanted to have the same amount of money, just now in the TFSA instead of the RRSP, they would need to deposit the after withholding tax amount from the RRSP withdraw, into the TFSA immediately and then deposit the tax refund amount after his tax return is assessed. If he does it right away, the withholding tax will be back in the spring.

This maneuver would save a Canadian about $2,400 minimum, in future taxes, for each year it can be executed. It is a no brainer. Koodos to you for noticing it.

By the way. I was dumping on a Financial Advisor who might not have known the pluses and minuses of this maneuver. I would not expect many Canadians to truly understand it and the lion's share of those would not even have identified that an opportunity might even exist. Good job.


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## bumblebee (Jan 15, 2015)

Won't qualify for DTC/RDSP, as his disability is considered temporary.

Thanks everyone for the replies. I was 99% sure this was the right move, however it's always a good idea to double check with some of the wise posters in this forum


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## lonewolf :) (Sep 13, 2016)

Would not put money in a TFSA unless going into something like a GIC. The odds are too high for a deflationary crash over the next decade.


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## Eclectic12 (Oct 20, 2010)

A potential deflationary crash AFAICT makes no difference to what account one is uses or whether one withdraws from the RRSP to move to a TFSA. Should one feel GICs are the way to go, these can be bought in either account.


Cheers


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## lonewolf :) (Sep 13, 2016)

Eclectic12 said:


> A potential deflationary crash AFAICT makes no difference to what account one is uses or whether one withdraws from the RRSP to move to a TFSA. Should one feel GICs are the way to go, these can be bought in either account.
> 
> 
> Cheers


 It does matter looking @ it this way.

If one has TFSA maxed out & those investments drop by 90% there will be less money to grow tax free in the account. 

After the market drops 90% then put your money in TFSA as there is a limited amount of money that can be put in a TFSA.

If interest rates go to 8% & the investor has lost 90% Of their TFSA room & wants to invest in a GIC there will not be much room in the TFSA left to let the GIC grow tax free.


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## Eclectic12 (Oct 20, 2010)

For new money going into the TFSA ... sure.

The challenge I see is that the original post reads that the funds/investments are coming from the RRSP. A 90% drop seems just as bad in the RRSP as there won't be much to left to move to the TFSA. I suppose one could look at the RRSP drop as being a bit better as the gov't shares one's pain but where one needs the RRSP as a significant source of funding of retirement, I doubt one will agree all that much.


Or to put it another way ... any actions to protect against a potential deflationary crash should be taken in all accounts. Any movement of funds is secondary, IMO.


Cheers


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