# Can Early Withdrawals Reduce The RRSP Tax Hit?



## Echo

Larry MacDonald's piece for the Globe and Mail this morning - http://www.theglobeandmail.com/glob...s-can-reduce-the-rrsp-tax-hit/article2351732/

I'm a long way from retirement, but my mom (58 and semi-retired) is quoted in the article about moving funds from her RRSP to her TFSA over the next few years. I'm curious how others feel about this approach.

PS - I'm sure my mom will be thrilled to hear she was mentioned in a story along with Garth Turner :|


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## steve41

Echo said:


> Larry MacDonald's piece for the Globe and Mail this morning - http://www.theglobeandmail.com/glob...s-can-reduce-the-rrsp-tax-hit/article2351732/
> 
> I'm a long way from retirement, but my mom (58 and semi-retired) is quoted in the article about moving funds from her RRSP to her TFSA over the next few years. I'm curious how others feel about this approach.
> 
> PS - I'm sure my mom will be thrilled to hear she was mentioned in a story along with Garth Turner :|


 You need to look at the actual numbers. Remember, withdrawing from your RRSP when you are working (ostensibly in a high tax bracket) invokes a near term (possibly large) tax hit now. When you are retired, it is a different matter. It is not a simple calculation, you need to consider the time value of money, and the fact that tax rates are much reduced in the future (age credits, indexed tax brackets....)


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## DanFo

It would add credibility if they stated what her current tax bracket was and what her tax bracket was projected to be in retirement so the tax savings would be a little clearer, a miniscule change in tax savings could lose out to the tax defererred growth of the money in the rrsp.. It could prove to be a decent stragedy if the differrence is significant though.

I think most people on this forum will end up in a situation where their tfsa's are already maxed and their rrsp's could very well be near maxed out. It at least should be another reminder for people to be aware of their future tax obligations with regards to their projected income streams in retirement.


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## steve41

You must be getting tired of this rant.... it is VERY unusual to find a situation (working>retired) where tax rates in retirement are the same or higher than pre-retirement.


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## the-royal-mail

Of course. But this is why I prefer the TFSA. Pay the tax now and not have to worry about it. Though I do understand the point about sheltering in RRSP in high-tax years and wd in low tax years, I still like the flexibility of the TFSA. And that $ can always be moved into RRSP anytime, if I change my mind in the future. Not quite as easy to do the other way around. The article said something about withdrawing in kind from RRSP to TFSA to avoid taxes but I don't think that's correct. I think as soon as the money leaves the RRSP it is taxed, regardless of what mechanism is used to move the money.


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## HaroldCrump

the-royal-mail said:


> Of course. But this is why I prefer the TFSA. Pay the tax now and not have to worry about it.


Steve41's calculations have shown time and again that for the most part, both strategies come out almost equal, even if you assume the same tax rate.
At lower tax rates, the benefits of RRSP are more.

To me, the wildcard here are the tax rates in effect 20, 30 or 40 years from now, when the subjects in question are ready to retire.
There is nothing stopping the govt. from increasing tax rates, lowering tax brackets for a given rate, increasing clawbacks, or even completely eliminating certain programs (such as OAS) making our current assumptions and calculations irrelevant.


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## Toronto.gal

Good topic and haven't given it much thought as I'm far from retirement also, but the first thing that comes to mind is that only the after-tax residue would be there to invest, so perhaps not a bad idea, if one can sell high now, transfer the assets less the tax & then let the investments grow tax-free.  

I will read the article later.


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## square one

I was thinking of this scenario recently also. Since my husband will be eligible for his DB pension about 2.5 yrs before I will be able to collect my small DB pension, I was thinking that maybe I would reduce my work hours to about 1 or 2 days a week for my final 2 yrs, to reduce my income and enjoy some time off with hubby, and withdraw some $ from my RSP to take advantage of the lower tax bracket. The goal would be to just move that money into another non-reg acct for use in future yrs, not to actually live off of at that time. (Plan is for our TFSAs to be maxed out which is reason for non-reg) Of course, getting my employer's approval to reduce my hours and still be part of the pension plan would be the next consideration.


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## Square Root

steve41 said:


> You must be getting tired of this rant.... it is VERY unusual to find a situation (working>retired) where tax rates in retirement are the same or higher than pre-retirement.


I 'm not sure how unusual it is but in my case my tax rates will always be at the max marg rate.


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## Square Root

square one said:


> I was thinking of this scenario recently also. Since my husband will be eligible for his DB pension about 2.5 yrs before I will be able to collect my small DB pension, I was thinking that maybe I would reduce my work hours to about 1 or 2 days a week for my final 2 yrs, to reduce my income and enjoy some time off with hubby, and withdraw some $ from my RSP to take advantage of the lower tax bracket. The goal would be to just move that money into another non-reg acct for use in future yrs, not to actually live off of at that time. (Plan is for our TFSAs to be maxed out which is reason for non-reg) Of course, getting my employer's approval to reduce my hours and still be part of the pension plan would be the next consideration.


Don't forget you can take advantage of lower tax rates by electing to split for tax purposes your husband's pension.


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## steve41

Square Root said:


> I 'm not sure how unusual it is but in my case my tax rates will always be at the max marg rate.


 The only time that happens is when you are sitting on a gazillion dollars, and the last thing you are concerned about is retirement. In other words, you are passing on a huge estate. For the average joe, working, saving in his RRSP for retirement, living off the proceeds of his savings, and either dying broke or passing on a modest estate.... it is hard to make a case for the same tax rates pre and post retirement.


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## Echo

square one said:


> I was thinking of this scenario recently also. Since my husband will be eligible for his DB pension about 2.5 yrs before I will be able to collect my small DB pension, I was thinking that maybe I would reduce my work hours to about 1 or 2 days a week for my final 2 yrs, to reduce my income and enjoy some time off with hubby, and withdraw some $ from my RSP to take advantage of the lower tax bracket. The goal would be to just move that money into another non-reg acct for use in future yrs, not to actually live off of at that time. (Plan is for our TFSAs to be maxed out which is reason for non-reg) Of course, getting my employer's approval to reduce my hours and still be part of the pension plan would be the next consideration.


I believe this is my mom's plan as well. She works (very) part-time and wants to delay taking her work pension and CPP.


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## Sampson

I've never doubted the benefit of the RRSP, and I'll 2nd the efforts by steve to demonstrate that it and the TFSA come out the same.

Where one can exact control is the retirement date. Retire early, earn nothing or reduced amounts for a few years, and start pulling monies out. That's definitely my plan, and it's is the only way to ensure the RRSP is not only a tax-deferred account, but also to make it into a reduced tax account.


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## olivaw

My plan is also to retire early and spread out RRSP withdrawals over as many years as possible. My (admittedly simple) calculations suggest that I can reduce my lifetime tax bill by withdrawing some of my funds before CPP and OAS commence. 

There is also a freedom argument to withdrawing RRSP funds as early as possible. Non RRSP funds are subject to fewer constraints.


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## Karen

steve41 said:


> The only time that happens is when you are sitting on a gazillion dollars, and the last thing you are concerned about is retirement. In other words, you are passing on a huge estate. For the average joe, working, saving in his RRSP for retirement, living off the proceeds of his savings, and either dying broke or passing on a modest estate.... it is hard to make a case for the same tax rates pre and post retirement.


Steve, I don't think it's as rare as you make it sound. I am (unfortunately ) not sitting on a gazillion dollars but, due to survivor benefits from US Social Security and other survivor's pensions plus my own pension, I'm in a higher tax bracket than I was when I was working. I didn't realize that would be the case in time to make early withdrawals from my RRSP, so all I can do is delay converting it to a RRIF for as long as possible.


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## olivaw

Shouldn't estate planning also impact the decision to defer taxes? If you die and leave the money to a beneficiary other than a spouse, the estate has to pay taxes as if all of RRSPs and RRIFs were cashed in. It happened to my wife and her siblings when their mother passed away. RRSPs were taxed at the highest marginal rate and the tax bill was astronomical. 

Check out: 
http://www.canadianliving.com/life/money/what_to_do_with_an_inheritance_3.php



> Unfortunately, the tax man doesn't forget us when we die. Before an inheritance can be doled out, the Canada Revenue Agency(CRA) has to get a cut. Depending partly on how rich the deceased person was, up to half of the estate can go to taxes.


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## steve41

> Shouldn't estate planning also impact the decision to defer taxes? If you die and leave the money to a beneficiary other than a spouse, the estate has to pay taxes as if all of RRSPs and RRIFs were cashed in. It happened to my wife and her siblings when their mother passed away. RRSPs were taxed at the highest marginal rate and the tax bill was astronomical.


 Quite true, but if you avoid saving via your RRSP, you have less to save, since you won't be getting the RRSP rebate. The extra savings that accrue to the RRSP pot as opposed to the size of the 'outside the RRSP' pot will make up for that tax hit on death.


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## steve41

> Shouldn't estate planning also impact the decision to defer taxes? If you die and leave the money to a beneficiary other than a spouse, the estate has to pay taxes as if all of RRSPs and RRIFs were cashed in. It happened to my wife and her siblings when their mother passed away. RRSPs were taxed at the highest marginal rate and the tax bill was astronomical.


Here is a study which explains things better....ESTATE and RRSP


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## Sherlock

It just seems wrong that all these well-off retirees and almost-retirees with over a million dollars in their retirement accoutns are so worried about having their OAS clawed back. If I were a millionaire I'd feel guilty about accepting even a cent of OAS, when there are so many people who need it much more than myself. When I retire I hope to not receive any OAS at all, because I expect to be making enough passive income to disqualify me from it.


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## olivaw

Thanks Steve. That is very helpful. I agree with your advice about the benefit of RRSP contributions and have maximized my RRSP contributions for many years. 

On the reverse side, I am now approaching early retirement. My math suggests that I can reduce my lifetime tax bill if I retire early and draw down my RRSP over as many years as possible. The math seemed to work because my wife an I will have zero pension income before CPP kicks in. It seems that I can maximize the benefit of the basic personal exemption and lower taxes on the first portion of my income. 

Here are the figures I used in my federal tax calculation spreadsheet to estimate my lifetime taxes: 
- 0% on the basic personal exemption 
- 15% on the first $42,707 of taxable income
- 22% on the next $42,707 of taxable income 
- 26% on the next $46,992 of taxable income 
- 29% of taxable income over $132,406.

For Alberta, my calculation uses the 10% flat tax rate for income taxes. (May not last. The government will probably reintroduce progressive taxes if they can use it to increase revenues when the oil and gas royalties dry up). 

My wife an I are not excessively wealthy. We do have some capital gains sitting in funds outside of our RRSP but we are not going to have to worry about earning more than 42K per year each. It seems that we can legally avoid the 26% and 29% marginal rates. 

If we leave it all in the RRSP as long as possible then wouldn't federal taxes on the majority of the money be taxed at 29% if/when we pass away and leave the money to the kids? 

Note: This all gets complicated by capital gains. We're savers. We've maximized RRSP and TFSA contributions and have also accumulated money in non registered investment accounts. We may need to balance RRSP withdrawals against capital gains if we want to reallocate. It makes my head spin.


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## steve41

Each situation is different. Also, remember.... it isn't the overall tax you pay, it is the discounted PV of that tax stream. Also, the tax brackets are indexed to inflation, so tax on $50K now can be much greater than tax on $50K in 10 years time.


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## olivaw

steve41 said:


> Each situation is different. Also, remember.... it isn't the overall tax you pay, it is the discounted PV of that tax stream. Also, the tax brackets are indexed to inflation, so tax on $50K now can be much greater than tax on $50K in 10 years time.


AHH, the discounted PV of the tax stream makes sense. 

I threw in some estimates for inflation and ROI in the spreadsheet. My assumptions had a significant impact on the calculation. I have no ability to predict the future. According to those that claim predictive prowess, we're in for inflation, deflation, hyperinflation, bear markets, bull markets, glorious economic growth and the collapse of the world monetary supply. And that's just next week. 

More seriously, I tried using 2% inflation and 4% ROI in my RRSP but eventually decided that I should work with 0% inflation and 2% ROI. Or, said another way, inflation + 2% ROI. Tax rates and brackets unchanged and calculated out to 2054. My assumptions will be terribly wrong but I don't really know what else to use. 

The result is that my best assumptions lead me to believe that there are some benefits from spreading RRSP withdrawals over as many years as possible: 

- Modestly lower total taxes (as far as I can tell with my calculations and assumptions). 

- More flexibility with my savings. (I can invest it in a vacation property, a motor home, my kids, charities etc. More of a lifestyle decision than a sensible investment decisions). 

- The health benefits of retiring early. (In my case, I happen to believe this is valid. I like my job and my employer but it can be stressful. I've already had a health scare).


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## pwm

*Annuity or not. That is the question.*

In my opinion, whether or not to draw down an RRSP depends on the annuity question. The conventional model of RRSPs was that one would purchase an annuity from a lifeco after stopping work, which would form one's own personal pension. Nothing wrong with that model, but if you don't plan to buy an annuity then you need to get that money out over as many tax years as possible. That entails starting withdrawals the first year you are retired when your marginal tax rate is at its lowest. 

I retired 7 years ago. I don't plan to buy annuities, so I did a "future value" calculation using age 80 as the point in time when I want to have zero RRSP/RRIF money left. Using various rates of return I came up with an amount to withdraw each year, and I've stuck with the plan, and will continue to do so going forward. Naturally I'm maxing out my TFSAs. The worst case scenario, which you need to avoid no matter what is the "last spouse dies with money still in an RRIF"!

I shudder whenever I hear so called experts like Gordon Pape, that should know better, make the statement: "Never take money from your RRSP because it's growing tax free." What he should be doing is prefacing that statement with the clause "If you plan to buy an annuity," but you never hear them say that.

Of course one could always use a hybrid strategy where you reduce the amount in the RRIF over many tax years, and then close it out by converting the remainder to an annuity.


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## steve41

OK.... (I don't cherry pick these examples BTW)

a 62 yearold... retired with 400K in his RRSP and 200K in nonreg. In one case (shelter) he decides to leave his RRSP alone until RRIF time. His taxes over time are skewed.... much higher post 71. The the other case (melt) he chooses to slowly start to melt his RRSP so as to equalize his tax starting now.

Result?.... 'the melt strategy' delivers a lower BQ than the 'shelter' strategy.

This is not well suited for spreadsheeting.... it is too complex.

Shelter RSP

Melt RSP


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## pwm

*BQ?*

I'm sorry steve41, but I've given up trying to think of what the acronym "BQ" might stand for, and I couldn't find it in my "Barron's Dictionary of Finance Terms".

Can you help?


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## steve41

pwm said:


> I'm sorry steve41, but I've given up trying to think of what the acronym "BQ" might stand for, and I couldn't find it in my "Barron's Dictionary of Finance Terms".
> 
> Can you help?


 BQ stands for Burger Quotient. It is the column on the right on page 7 (in green) It represents what is left over to spend on 'stuff' (beer & groceries), after taxes, investment contribs/withdrawals, loan pmts.... etc have been accounted for. Expressed in today's dollars. BQ isn't my invention, I believe the terms ATI (after tax income) or lifestyle are more common.


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## pwm

Thanks for the reply. The results are interesting, but not very close to my situation. I'd be interested in seeing the results when the model is closer to mine.
Your model has no DBP. I have $25,000/yr.
My RRSP = $170,000
My Nonreg = $1.4 million
My investment income = $50,000/yr with about 80% being dividends.


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## steve41

Age?
Salary?
I would need those at a minimum.


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## pwm

Age 62, retired.


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## steve41

Check the data to see that I didn't miss anything....

Shelter (new run)
Melt (new run)


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## pwm

Thanks for that steve41. Those reports are very interesting.

You are certainly correct in that there are very many working parts in this sort of calculation. I've been using spreadsheets and Ufile scenarios with limited results because of all the variables that can't be included in the projections.


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## RedRose

> Your model has no DBP. I have $25,000/yr.
> My RRSP = $170,000
> My Nonreg = $1.4 million
> My investment income = $50,000/yr with about 80% being dividends.


I too was wondering the very same. 
Each situation is so very different.

Good topic...


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## olivaw

I agree, very good topic. Those links that Steve posted were quite informative.


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## Financial Cents

Great topic. I'm working with my parents on this issue right now.

They still have debt (LOC) and a small mortgage, so considering withdrawing from RRSPs to pay this debt down now. My parents don't have an income problem, they have a debt problem. They will both collect OAS in a couple of years and there is some risk it might be clawed back if they don't start winding down the RRSPs.


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## caricole

steve41 said:


> You must be getting tired of this rant.... it is VERY unusual to find a situation (working>retired) where tax rates in retirement are the same or higher than pre-retirement.


*It seems some people overlook the «CLAWBACK STARTING AT AGE 65»

15% extra tax on whatever taxrate you are

For 2011 it starts a 67.688,00$

If there is any chance you will fall in the clawback trop....start to withdram RRSP every year before the age of 65

Even if your taxbracket goes up a few points it is nothing to compare by the 15% extra

The Federal governement has christened it wih the Holy name of «RÉIMBURSEMENT OF SOCIAL PAYMENTS» or something like that.....but when I see some cases where it could have been avoided by cashing in on RRSP or RIF «BEFORE AGE 65» but it was never mentioned to these people

Of course, the interest of Financial Planners, Financial Advisers and the likes is not with the individual....but with the size of the portfolios under their control

The commissions on a RRSP portfolio....(money before taxes) will be much grater than the commissions on that SAME portfolio AFTER TAXES

Result:

Clawback-trap starting a 65.........NEVER MENTIONED*


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## steve41

All the plans I post include both the OAS and GIS clawbacks.


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## Zeeshan Hamid

caricole said:


> *It seems some people overlook the «CLAWBACK STARTING AT AGE 65»
> 
> 15% extra tax on whatever taxrate you are
> 
> For 2011 it starts a 67.688,00$
> 
> If there is any chance you will fall in the clawback trop....start to withdram RRSP every year before the age of 65
> 
> Even if your taxbracket goes up a few points it is nothing to compare by the 15% extra
> 
> The Federal governement has christened it wih the Holy name of «RÉIMBURSEMENT OF SOCIAL PAYMENTS» or something like that.....but when I see some cases where it could have been avoided by cashing in on RRSP or RIF «BEFORE AGE 65» but it was never mentioned to these people
> 
> Of course, the interest of Financial Planners, Financial Advisers and the likes is not with the individual....but with the size of the portfolios under their control
> 
> The commissions on a RRSP portfolio....(money before taxes) will be much grater than the commissions on that SAME portfolio AFTER TAXES
> 
> Result:
> 
> Clawback-trap starting a 65.........NEVER MENTIONED*


Can you please explain how clawback is "15% extra tax"? I assume you're talking old-age security. That's not your CPP, pension, RRSP, TFSA or any other saving. That's money taxpayers are just giving you (it's funded from general tax revenues). Once your income goes above $65K (honestly I think clawback should start sooner), taxpayers say "hey, can you please take a little less from us since you have other income). Once your income (post splitting and all) is above ~$120k, you basically stop receiving any OAS. That's not "15% extra tax". That's you not getting this money because your income is too high. 

It's absurd IMO that people with $million portfolios can still get OAS because they manage their withdrawals to reduce their "income".

All that said, having "too much income in retirement" is a great problem to have. I hope to always have enough income to never, ever qualify for any income-tested program.


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## slacker

@caricole: you are incorrect. Steve41's result always consider clawbacks. Please have a detailed look at his reports.


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## Eclectic12

Zeeshan Hamid said:


> Can you please explain how clawback is "15% extra tax"?
> 
> I assume you're talking old-age security. That's not your CPP, pension, RRSP, TFSA or any other saving. That's money taxpayers are just giving you (it's funded from general tax revenues). Once your income goes above $65K (honestly I think clawback should start sooner), taxpayers say "hey, can you please take a little less from us since you have other income). Once your income (post splitting and all) is above ~$120k, you basically stop receiving any OAS. That's not "15% extra tax". That's you not getting this money because your income is too high.
> 
> It's absurd IMO that people with $million portfolios can still get OAS because they manage their withdrawals to reduce their "income".
> 
> All that said, having "too much income in retirement" is a great problem to have. I hope to always have enough income to never, ever qualify for any income-tested program.


+1.

The other part that IMO is just as overlooked as retirement income planning is that the OAS clawback is based on "Net Income".

What benefit is it to jump through hoops, withdraw from an RRSP now to "pay the taxes" and end up with investments so large that the OAS clawback happens anyway? The investment income will give more flexibility to structure the type of income but is forgoing the tax deferred gains.


As for the:


caricole said:


> ...Clawback-trap starting a 65.........NEVER MENTIONED


YMMV. My parents certainly didn't have it mentioned - though they ignored a lot of other financial advice. There's been a bunch of newspaper articles about the OAS clawback plus several threads here on CMF.

Based on the discussions I'm reading, IMO the pendulum has swung too far the other way. The people who didn't learn about how the RRSP worked and trusted the assumptions in newspaper articles are now repeating the same mistake. There are assumptions in the "it's better for lower MITR individuals to avoid or meltdown an RRSP", which may not fit.

Bottom line is that it's a complicated situation with a lot of variables that need to be checked by the individual.


Cheers


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## steve41

I may be off-base here, but I used to recall seeing various "planners/advisers" touting seminars. The hook would be to the effect that "RRSPs are evil/ill-considered", and they would show some very simplistic examples displaying the evils of OAS clawback, huge tax bills when the RRIF had to be collapsed. It was a powerful hook, especially for those who had been schooled on the "Max your RRSP" mantra. The problem is.... that mantra almost always holds true, when you examine the math.


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## Financial Cents

Great comments Steve41 and Zeeshan.


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## pwm

Here's an item from Gordon Pape on this issue which I cut from WebBroker:

Draw down RRSP? 
Q: Please give me some advice about my situation. I am 57, retired with a pension, have RRSPs and savings. I was thinking of starting to draw down my RRSPs ($10,000 annually) to minimize the total tax on the RRSPs including the final tax (estate tax), which would occur in one tax year. Is this a good idea or do you believe it would be better to spend my non-registered savings first? - Ed D.

A: Stop and think about what you are saying. You are proposing to pay tax on your RRSP savings many years before you have to, in the hope (not the certainty) that you'll end up paying less tax in the end. It seems a lot of people are thinking the same way. I suggest that in most cases the strategy is deeply flawed and will actually end up costing you more.

,p. For starters, you don't have to draw any money from the RRSP for another 15 years (the year after you turn 71). That means you will lose years of tax-sheltered compounding for every dollar you withdraw prematurely. If you currently have a marginal tax rate of 30 per cent, you will effectively be depriving yourself of 15 years of growth on $3,000 when you make that first year withdrawal of $10,000. At a 5 per cent average annual compound rate of return, that $3,000 would more than double to $6,237 by the end of that time. Even if your marginal tax rate were higher at that point you would still come out well ahead.
And how do you know it will be higher? With 15 years of bracket creep due to inflation, you could be paying at the same rate or even less by age 72. As for the final year, there is no estate tax in Canada. If there is no surviving spouse, your RRSP or RRIF would be deemed to have been cashed in the year you die and the money will be included in your final tax return. If you live a long time, there may be very little left.

As far as I'm concerned, it's never a good idea to pay taxes sooner than you have to - especially 15 years sooner!


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## Spudd

It seems to me, that for people with a DB pension, that the best thing to do is keep working until your pension is at a sufficiently high level that you feel you can live off it alone. Then retire, and draw down the RRSP's during the years between your actual retirement date and when you choose to start hte pension. Eg. for me, I can take my pension at 55 but with a reduction, or I can wait until 60 and get full pension. So once my full pension is livable, I'd retire and live off the RRSP's until I get to 60, then switch to taking the pension. Does it make sense?


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## steve41

Spudd said:


> It seems to me, that for people with a DB pension, that the best thing to do is keep working until your pension is at a sufficiently high level that you feel you can live off it alone. Then retire, and draw down the RRSP's during the years between your actual retirement date and when you choose to start hte pension. Eg. for me, I can take my pension at 55 but with a reduction, or I can wait until 60 and get full pension. So once my full pension is livable, I'd retire and live off the RRSP's until I get to 60, then switch to taking the pension. Does it make sense?


You have to do the actual math.... also, an issue which many forget is actuarial.... when do you 'feel' is your most probable time of death. Net to estate has to figure into the calculation, unless you are a childless bachelor/spinster.


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## MoneyGal

Except...if you have longevity-insured income (i.e., DB pension that is "sufficient,") then you don't have to worry about the actuarial part. Right? 

I guess it depends on whether you are solving for "pay the least amount of lifetime tax" vs. "develop a plan to create a retirement you can live with." Paying the least amount of tax is a mug's game, because you can never know what tax rates will do in the future. I think the plan as outlined is the "right" one and I'm surprised in a way that you'd question whether it makes sense, Spudd...


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## steve41

It turns out that maximizing your lifestyle/aftertax income and minimizing the tax stream (PV of) are one in the same.


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## MoneyGal

Oh, for sure - I think I'm trying to say that the concern with *maximizing* ATI (or *minimizing* total tax payable - this is saying the same thing, after all) may not be the right concern for some, or the only concern in retirement income planning - for some (many?) people, the approach suggested by Spudd is likely good enough. 

That is: "I have guaranteed lifetime income starting at age x, and I have $xxx,xxx saved to spend until age x, so my plan is to withdraw from registered accounts until my DB pension kicks in. Sure, I might pay more total tax following this plan than by following some other plan (retire later, delay RRSP withdrawals) -- but I've identified and mitigated the big risks, and I have a high enough degree of certainty to implement this plan."

This is different than "doing the math," and while I am a huge proponent of doing said math, I also recognize that there's a lot of uncertainty no one individual can manage. Spudd's plan seems like a (really) good saw-off to me.


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## steve41

> Spudd's plan seems like a (really) good saw-off to me.


 I would have to see the numbers, but I have seen very few plans which indicate that melting your RRSP early has been a wise choice.


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## MoneyGal

I'm pursuing this, because I think it's important and interesting. 

"Wise choice" = what? 

How much more in tax does the person pay, compared to not melting; and how sensitive are those numbers to assumptions which either might change or are unlikely to be achieved as planned (ie., tax rates, straight-line investment return assumptions)?


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## Spudd

I too thought it seemed like a good plan, but I know there are a lot of people (eg Moneygal) who know more about financial planning than me on this forum. So I figured asking if it made sense, made sense.

I have no kids, nor any plans to have any. So maximizing my estate is not a concern. Having enough to live out my days comfortably is.


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## steve41

OK..... I will dream up my own numbers.

Our guy is 60, retired, with 200K in his RRSP, 50K in non-reg and a $25k pension (not integrated).

In one study, he decides to shelter his RRSP, and in the other study, he decides to aggressively melt his RRSP. Result.... forcing out the exact same ATI/lifestyle, his capital will last (just) to his 100th birthday, if he shelters his RRSP, and if he decides to attack/melt his RRSP, under that same ATI regime, his funds will run out at 96.

This is not a drastic example, but it is supportive of sheltering.

Shelter RRSP
Melt RRSP
Tax comparative RRSP

Take notice of page 7 of each plan. The total tax paid for the 'shelter' plan is higher than for the 'melt', however the PVs of the tax stream tells a different story.


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## MoneyGal

But...isn't it supportive of *either*? I understand that you can get marginally more money if you don't melt (AND you live to 100)...but in the plan you dreamed up, the guy is "safe" to age 96 in any case. This is why I am saying Spudd's plan "looks good" to me. 

If your goal is to "pay less tax" (on a PV basis) *above all other goals,* then given the assumptions you've used, not melting is the better scenario. But is that really the ordinal value in retirement planning?


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## steve41

MoneyGal said:


> But...isn't it supportive of *either*? I understand that you can get marginally more money if you don't melt (AND you live to 100)...but in the plan you dreamed up, the guy is "safe" to age 96 in any case. This is why I am saying Spudd's plan "looks good" to me.
> 
> If your goal is to "pay less tax" (on a PV basis) *above all other goals,* then given the assumptions you've used, not melting is the better scenario. But is that really the ordinal value in retirement planning?


 No, you are right, it isn't the only measure.... you will notice that the melt strategy may be better (for the estate) if the subject dies prematurely... Since Spud indicated (I think) he had no kids, then this is moot.


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## steve41

MoneyGal said:


> If your goal is to "pay less tax" (on a PV basis) *above all other goals,* then given the assumptions you've used, not melting is the better scenario. But is that really the ordinal value in retirement planning?


 Paying less tax on a PV basis is not the goal here. It is either extending a given lifestyle out to a maximum age, or (for the 'die broke' scenario) delivering the largest ATI over the 'die-broke' horizon.


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## Spudd

steve41 said:


> OK..... I will dream up my own numbers.
> 
> Our guy is 60, retired, with 200K in his RRSP, 50K in non-reg and a $25k pension (not integrated).


Yeah, but, in your example the pension is being taken from day 1. In my scenario, you live off the RRSP at first, and then take the pension later. 

So let's say I retire at 55, with a pension which will start at 60 of 42k. 300k in RRSPs. I live off the RRSPs from 55-60 and then take the pension starting at 60. 

By the way, I'm a girl.


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## steve41

Well, naturally you are going to be attacking your RRSP in the early years.... you have no other alternative short of robbing banks or living in a homeless shelter. Ima's plan


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## Spudd

Well, you do have an alternative, you could take the early reduced pension at 55 instead, and combine that with the RRSP's to top you up to the full pension levels. I don't know which is more tax efficient. Based on the plan with the parameters of doing the meltdown it looks like you would have a safe everlasting BQ of 44k, not bad.


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## Maltese

Spudd, are you certain that you can retire at 55, leave your pension in the plan until age 60 and then receive the benefit of an unreduced pension? (Which you weren't entitled to at age 55).

Other pensions include my own, require the employee to work to age 60 or have a magic number of age + service to receive an unreduced pension prior to 60. There is no benefit to retire at 55 and not collect the pension.

Added: My plan is to take out money from my RRSP each year prior to the mandatory withdrawal date, pay the tax and put the remainder into my TFSA. Ideally I would like to deposit the maximum amount each year to the TFSA.


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## Spudd

I am not 100% sure, but the way they phrase it is your pension is x times your best 5 years salary x years of service. So in theory if I retire at 55 with 30 years service I wouldn't have to take the pension until 60 . In fact, the more I think about it, it must be that way. If I were to leave the company I'd still be entitled to the same pension based on salary and years off service. But obviously I'd double check before actually retiring.


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## pwm

The problem I see with the "shelter" strategy is the fact that the projections go to age 100. CRA's minimum withdrawal rate is not aggressive enough. Almost no one lives past 90. Look at mortality tables, or do an online life expectancy calculator and you will see that 85 is more likely. At 85 with a 5% growth rate, there is more than 50% of the principal remaining. Of course two people will live longer than one, so that age will increase a little, but I think it's wise to try to avoid the "last spouse dies with a large RRIF" scenario where CRA scoops up 45% of the remaining money on the final tax return. It may be true that leaving it until 72 makes sense, but I think you then need to withdraw it at a faster pace than the CRA minimum.

What are your thoughts steve41?


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## steve41

Here is that same study as above.... Net to estate

The 'net to estate graph' represents what your estate will see -after tax- should you die at any point in time.


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## kcowan

Looks like the NPV to the estate breaks even around age 80. Given that is when the average guy dies, probably a moot point.


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## steve41

The net to estate crossover is 73-ish for the example.


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## MoneyGal

kcowan said:


> Looks like the NPV to the estate breaks even around age 80. Given that is when the average guy dies, probably a moot point.


There is no average guy. "Average life expectancy" means that 50% of the population is still alive at that age, and 50% is dead. The distribution of actual lifespans around that number is pretty wide -- wider than the distribution of stock market returns around the average for the past seven decades, for example.


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## pwm

I understand that life expectancy is based on a statistical mean, but I still think it makes more sense to plan on the most likely scenario rather than the least likely one. (Living to 100). 

It kind of makes me think of the TV show "Doomsday Preppers". It shows people who are building bomb shelters, stocked with dried food, and guns, always lots of guns, because they are convinced there will be a Zombie apocalypse, or the earth's axis could shift tomorrow. It's not logical thinking.


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## MoneyGal

pwm said:


> I understand that life expectancy is based on a statistical mean, but I still think it makes more sense to plan on the most likely scenario rather than the least likely one. (Living to 100).


Living to 100 is only slightly less likely than living to 85. (NOTE: I am talking about dying at age 100, compared to dying at age 85.)

The most logical approach (IMO) is to plan using the full distribution of probabilities. What's your probability of surviving to any given age? Set aside more money for the years with higher probabilities, and less money for the years with lower. 

Setting aside the same amount for every year (i.e., I need $40K every year) and drawing out the end of the plan to later and later years (i.e., I need it for every year to age 95...or to age 100) doesn't make any sense either. It provides a sense of comfort but it is extremely inefficient from an economic point of view.


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## pwm

It's interesting that CRA changed the withdrawal rules a while back. They changed the rate from the "1/90 minus your age" to the present formula. The old rate took the remaining 100% out at age 90. The current formula only goes to 20% at age 94, so in effect carries on past 100. This effectively leaves a lot more money in many people's RRIFs when the second spouse dies, if they stay with the CRA minimum withdrawal rate. 

Maybe I'm just cynical, but to me this looks like a move by the government to cash in on a windfall of income from final tax returns.


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## MoneyGal

Uh. Are you now taking the case that "many people" live beyond age 94? Didn't you just say that "the most likely scenario" is NOT living to an advanced old age (i.e., 90+)?


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## MoneyGal

The other side of this argument is that the RMDs (required minimum distributions) from tax-sheltered accounts are higher in Canada than they are in many other countries, including the U.S. and Australia - meaning that retirees are forced to take unvarying amounts into income -- so the government gets the tax earlier, not later.


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## pwm

Under the old rules all the money was out by age 90. Under the new rules some will still have money at age 90. It will not be many people, but I still think the rule change will be to the government's advantage.


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## steve41

Examine the comparative net to estate graphs  again. What happens if we die in five years and had chosen to adopt an RRSP sheltering strategy. It appears our estate will be disadvantaged to the tune of $20k.... inheriting $165K instead of $185K.

Now look at what happens at the other end of the life sweepstakes spectrum.... If we had made it to age 95, our estate would net $80K under the shelter option and zero under the melt option.


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## Four Pillars

pwm said:


> Under the old rules all the money was out by age 90. Under the new rules some will still have money at age 90. It will not be many people, but I still think the rule change will be to the government's advantage.


This doesn't make sense.

The government would be better off if the money was withdrawn earlier, not later.


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## MoneyGal

^ This.


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## steve41

I would dearly love to change the title of this thread..... removing the word 'how' and substituting 'can'.


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## kcowan

MoneyGal said:


> There is no average guy. "Average life expectancy" means that 50% of the population is still alive at that age, and 50% is dead. The distribution of actual lifespans around that number is pretty wide -- wider than the distribution of stock market returns around the average for the past seven decades, for example.


When I did my serious planning in 2002, I found that my median was 92 with 20%iles at 84 and 100. So I use 100 as the "worst case" for my financial planning.


MoneyGal said:


> Living to 100 is only slightly less likely than living to 85. (NOTE: I am talking about dying at age 100, compared to dying at age 85.)


Yes I guess that parallels my experience.

I think the ability to melt down RRIF and put the proceeds in a TFSA is a major plus for today's seniors.


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## Sampson

MoneyGal said:


> Living to 100 is only slightly less likely than living to 85.


This is actually a pretty interesting and well documented observation among researchers who study aging. This is a high 'risk' of developing a terminal disease (whether heart, lung, disease, or cancer being some of the more prevalent) during the 55-75 age range. If you can get beyond those years healthy, the chance of living well into your 90's is quite high.

This is the interesting fact of curing these disease, if or when researchers can do it, it'll mean much longer lifespans, and theoretically, 120 and beyond should be possible (based on telomere length etc).


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## kcowan

When my Dad was 92, I completed a longevity calculator for him. It show a life expectancy of 3 years. By chance, he lived for 3 more years.


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## Financial Cents

steve41 said:


> I would dearly love to change the title of this thread..... removing the word 'how' and substituting 'can'.


Indeed. I am tempted to advise my parents of collapsing a small spousal RRSP before they get hit with more taxes once they start accepting OAS. They have some debt ($70 K+) which IMO really needs to be paid down, so any small withdrawals now over the next couple of years can be used for debt reduction, and avoid more taxes when they hit 65.


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