# A strong tax case for early RRSP drawdowns



## gibor365 (Apr 1, 2011)

Oaken sent me newsletter with interesting article that support my approach to convert RRSP to RRIF before you reach 65

_While it's tempting to "bask" in the low tax rates that may prevail between the years of full employment and full-stop retirement, in the long run you may be better off paying a little more tax now in order to avoid a lot more tax later. The latter can happen once you're required to annuitize or convert your RRSP to a RRIF.

Because of Canada's graduated tax system, tax rates escalate the more you earn. This has left many would-be retirees with the impression their retirement income will be lower and they'll be paying taxes at a lower rate. That in turn has led to the strategy of deferring receipt of registered retirement savings plan (RRSP) or registered retirement income fund (RRIF) income as long as possible.

However, more than a quarter of retirees are in a tax bracket that's either the same or even higher than in their working years, says a BMO Wealth Institute report published in 2013.

The solution may be to accelerate the drawdown of RRSPs in the decade prior to the RRIF years, or even to set up a RRIF years before it's required (by the end of the calendar year when you turn 71), especially if you have fallen into a lower tax bracket during the transition between full employment and traditional retirement.

Counterintuitive though it may appear, there is a strategy for people who are temporarily in lower tax brackets, says Robert Armstrong, Bank of Montreal's vice-president of managed solutions. He calls the strategy "Topping up to Bracket," which involves ensuring you receive a yearly income in the range of $12,000 (zero tax) and $42,000 (the lowest tax bracket).

Matthew Ardrey, a wealth adviser and vice-president of Toronto-based Tridelta Financial, says "there is certainly a benefit to ensuring your income remains below $42,000 if you can."

If you're temporarily in a lower bracket – perhaps you're between full-time jobs – you should move heaven and earth to maximize the precious non-taxed dollars you take into your hands every year, and after that, at least the very low-taxed dollars.

For everybody, including high earners, the first $11,635 of income is tax-free: This is the federal "basic personal amount" (BPA) in 2017. So the first $11,635 is a no-brainer, but next best are the lower-taxed dollars, which is where Mr. Armstrong cites the key number of $42,000. Between the BPA and $42,000 the federal tax rate is 15 per cent. Add in provincial tax and the result in Ontario is that in 2017, the first $42,201 of income has a top marginal tax rate of 20.05 per cent. After $45,916 of income, the combined federal/provincial tax rate becomes 29.65 per cent, and gets higher still for larger incomes.

For couples, if one spouse is fully employed and paying a top marginal tax rate (in Ontario) of 53.53 per cent (taxable income of $220,001 or more) while the other spouse has minimal income, I'd argue this: Every non-taxed or low-taxed dollar that the latter brings into the family unit is more valuable than each (roughly) 50-cent dollar the higher-income spouse generates in any extra income.

For pensioners 65 or older, the tax-free zone can exceed $20,000: That's the BPA, plus federal $7,225 age amount (in 2017) plus (if applicable) the $2,000 pension credit. (The age credit can be clawed back at high enough levels of income.)

Topping up to bracket in low-earning years is a use-it-or-lose-it proposition. If you let a year go by and bring in none of that tax-free income at all, you don't get to carry forward the opportunity to another year.

What if you have no earned income? Then it may make sense to withdraw some RRSP funds, as you probably were in a higher tax bracket when you made the original contributions. Raiding your TFSA makes little sense here because they're tax-free dollars anyway, so there's no urgency to de-register TFSA money while you're in a low tax bracket; besides, you want to maximize precious TFSA room after the age of 71, when those forced RRIF withdrawals put you in a higher tax bracket again.

Once you're 65, there's a case for limiting annual intake to $74,788, beyond which Old Age Security benefits are subject to clawback. OAS is completely clawed back at $121,071.

This is why Mr. Ardrey proposes "melting down" RRSPs before OAS or CPP kick in. Assuming they are in a lower tax bracket, "when many people think of an RRSP drawdown they only think of doing it up until the basic personal amount." But for someone with a large RRSP, this could be a detrimental decision.

Warren MacKenzie, head of Financial Planning at Toronto-based Optimize Wealth Management, says if you expect future income, and thus tax, to be higher, as well as clawed-back OAS "then it makes sense to withdraw some money from a registered account if it can be taken into income at a lower tax rate." However, if income is projected to be lower in old age, it may not make sense to pay tax sooner than necessary, he adds.

For most couples, the biggest tax hit comes after the second partner dies, RRIFs are collapsed and capital gains realized. Since the RRIF of the partner who dies first passes tax-free to the survivor, he or she is often pushed into a higher tax bracket_

https://www.theglobeandmail.com/glo...f85c53&elqaid=3101&elqat=1&elqCampaignId=2527


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## like_to_retire (Oct 9, 2016)

gibor365 said:


> Oaken sent me newsletter with interesting article that support my approach to convert RRSP to RRIF before you reach 65


_While it's tempting to "bask" in the low tax rates that may prevail between the years of full employment and full-stop retirement, in the long run you may be better off paying a little more tax now in order to avoid a lot more tax later. The latter can happen once you're required to annuitize or convert your RRSP to a RRIF._

There are many people that can take advantage of this situation, but just as many fail to do the detailed calculations to determine if it's actually a good idea. It takes a lot of work to go through those calculations. One of the biggest headwinds is the tax free compounding of an RRSP between those years. It's significant and many just ignore it.

ltr


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## lonewolf :) (Sep 13, 2016)

When interest rates are low there is less compounding of interest in RRSP i.e., if interest rates are 10% & 10,000 is paid in taxes each year for taking out money from RRSP in 10 years that 10,000 would grow to $201,249.10 which is $101,249.10 dollars more then was paid in taxes. 

Though when money is taken out the tax rate might be higher. When interest rates were high around early 1980s most left money in RRSPs as long as possible for money to grow tax free.

If thinking of retiring out side of Canada. Consider maxing out RRSPs then break off financial ties with Canada then take money out of RRSP @ I think it is 25% (Never looked to see if laws changed so maybe can not do anymore)


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## gibor365 (Apr 1, 2011)

> There are many people that can take advantage of this situation, but just as many fail to do the detailed calculations to determine if it's actually a good idea. It takes a lot of work to go through those calculations. One of the biggest headwinds is the tax free compounding of an RRSP between those years. It's significant and many just ignore it.


 Sure, you can dothose calculations,but nobody knows what will be future market return, FX rate, dividend stability or GIC rates.... the point is that if you retire before 65 , you can start withdraw moaney from registered account esp if it's less then 12K, so you pay 0 taxes


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## gibor365 (Apr 1, 2011)

> If thinking of retiring out side of Canada.


 Curious where?!


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## agent99 (Sep 11, 2013)

gibor365 said:


> Sure, you can dothose calculations,but nobody knows what will be future market return, FX rate, dividend stability or GIC rates.... the point is that if you retire before 65 , you can start withdraw moaney from registered account esp if it's less then 12K, so you pay 0 taxes


The article talks about limiting income to the point OAS clawback kicks in. Can't see that as the critical point. In our case, we converted to a smaller RRIF early. Just enough so that we could withdraw an amount that would keep us in a tax bracket lower than max. For those without pension, RRIF payments count as pension income so you then also get the $2000 pension credit. 

Calculations may seem complex, but are easy if you just plug the numbers into a Tax program. Free ones like Studio Tax or TaxFreeway work well. This won't tell you anything about how RRSP will grow between 65 and 71. But why not draw money early at a lower tax rate? Who knows - you may not make it to 71


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## jargey3000 (Jan 25, 2011)

gibor365 said:


> Sure, you can dothose calculations,but nobody knows what will be future market return, FX rate, dividend stability or GIC rates.... the point is that if you retire before 65 , you can start withdraw moaney from registered account esp if it's less then 12K, so you pay 0 taxes


are you saying that if you withdraw less than 12k,you pay 0 taxes on that - regardless of your overall total income ???????


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## gibor365 (Apr 1, 2011)

> But why not draw money early at a lower tax rate? Who knows - you may not make it to 71


 This is my point


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## gibor365 (Apr 1, 2011)

jargey3000 said:


> are you saying that if you withdraw less than 12k,you pay 0 taxes on that - regardless of your overall total income ???????


I don't say it , I say that you won't be taxed on total income up to 12K, and if you retired , your income (except) reg accounts comes from non-reg.... for example my income from non-reg will be 9-12K, so I have plenty of room to withdraw cash from registered


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## bgc_fan (Apr 5, 2009)

like_to_retire said:


> There are many people that can take advantage of this situation, but just as many fail to do the detailed calculations to determine if it's actually a good idea. It takes a lot of work to go through those calculations. One of the biggest headwinds is the tax free compounding of an RRSP between those years. It's significant and many just ignore it.
> 
> ltr


This can be mitigated by putting part of the funds into TFSA. Of course, I am making a few assumptions:
1. You don't actually need the money and the withdrawal is due to tax planning.
2. You don't have significant amount of income, otherwise you wouldn't be making the withdrawal to take advantage of the lower tax rate.
3. You normally wouldn't have contributed to the TFSA otherwise.

If your situation differs from any of these, then you would give up a bit of tax free compounding; however, if you are on the draw down phase, your tax rate shouldn't be that high.


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## lonewolf :) (Sep 13, 2016)

gibor365 said:


> Curious where?!


 I guess somewhere where dollars could be stretched if not enough dollars.


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## Nerd Investor (Nov 3, 2015)

like_to_retire said:


> _While it's tempting to "bask" in the low tax rates that may prevail between the years of full employment and full-stop retirement, in the long run you may be better off paying a little more tax now in order to avoid a lot more tax later. The latter can happen once you're required to annuitize or convert your RRSP to a RRIF._
> 
> There are many people that can take advantage of this situation, but just as many fail to do the detailed calculations to determine if it's actually a good idea. It takes a lot of work to go through those calculations. One of the biggest headwinds is the tax free compounding of an RRSP between those years. It's significant and many just ignore it.
> 
> ltr


Yes, this, as well as income tax bracket creep. 

Still, it was refreshing to see the article specify about withdrawing up to the lowest income tax bracket limit. As someone who has run these calculations numerous times, I've found that although everyone is different, most people will not hurt themselves in the long run if they keep withdrawals at a point where they stay in the lowest tax bracket. Conversely, if withdrawals push you into OAS claw back territory (which in Ontario is right around where you experience some big tax bracket jumps as well) you are almost certainly doing more harm then good by withdrawing early.


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## Eclectic12 (Oct 20, 2010)

gibor365 said:


> ... Because of Canada's graduated tax system, *tax rates escalate the more you earn. This has left many would-be retirees with the impression their retirement income will be lower * and they'll be paying taxes at a lower rate. That in turn has led to the strategy of deferring receipt of registered retirement savings plan (RRSP) or registered retirement income fund (RRIF) income as long as possible ...


Not sure this is true on a wide basis ... most people I talk to think in terms of the total tax bill with little understanding there are levels being paid. Those that notice the levels seem to assume the top tax rate is what they will pay without considering what their retirement income will be. Those who take these two into account properly then make the mistake of ignoring other sources of income such as registered accounts and/or gov't pensions.

The few I have met that have it all factored in typically have started to work on it so late in their careers that things like bridge benefits when retiring early take away the low income period.


It seems that because people aren't bothering to learn how it all works early, they go for general advice that is making a point instead of learning the ins/outs then checking where one fits. I can recall a poster on CMF who had spent years contributing to the RRSP for the tax break. After reading an article highlighting that there can be too much in an RRSP, he posted that his plan was to drain the RRSP *while working* to avoid this. Despite others pointing out that he had not estimated where he would fit - he doggedly kept posting he would drain his RRSP.




gibor365 said:


> ... However, more than a quarter of retirees are in a tax bracket that's either the same or even higher than in their working years, says a BMO Wealth Institute report published in 2013.


Of those willing to talk about it ... far less than 1/4 are in this situation. At the end of the day though - what reasonable projections/assumptions/models show for oneself is far more important than what others are experiencing.




gibor365 said:


> ... The solution may be to accelerate the drawdown of RRSPs in the decade prior to the RRIF years, or even to set up a RRIF years before it's required (by the end of the calendar year when you turn 71), especially if you have fallen into a lower tax bracket during the transition between full employment and traditional retirement.


It may be ... the challenge is that even among CMF posters - some latch onto the point then with checking where they are/may be, they lock into a single choice for a YMMV situation.


Cheers


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## jargey3000 (Jan 25, 2011)

gibor365 said:


> I don't say it , I say that you won't be taxed on total income up to 12K, and if you retired , your income (except) reg accounts comes from non-reg.... for example my income from non-reg will be 9-12K, so I have plenty of room to withdraw cash from registered


got it! for a min. there i thought something had changed!!!


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## gibor365 (Apr 1, 2011)

> Still, it was refreshing to see the article specify about withdrawing up to the lowest income tax bracket limit.


Exactly! Finaly I came accross article that supports my view , usualy all recomendation is to postpone converting to RRIF and start withdraw at 71


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## OnlyMyOpinion (Sep 1, 2013)

Eclectic12 said:


> ... It may be ... the challenge is that even among CMF posters - some latch onto the point then with checking where they are/may be, they lock into a single choice for a YMMV situation.


That is my concern with articles like Jonathan's "A Strong Case...", some people are so tax-adverse that they decide to melt down their retirement funds without fully accounting for all the variables, possibilities, or material impact. On paper perhaps you can save $10k or $20k over a retirement life, in reality you may not and you are unlikely to notice it anyway. 
The pillars of CPP and RRSP were set up with rules & conditions intended to ensure Canandians have a reasonable retirement income in spite of themselves. I would say FAYOR - fiddle at your own risk.


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## gardner (Feb 13, 2014)

bgc_fan said:


> This can be mitigated by putting part of the funds into TFSA.


It is also mitigated partly by converting pure income generated by the RRSP to tax-advantaged dividends and capital gains.


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## GreatLaker (Mar 23, 2014)

Other things being equal, deferring taxes is preferred because it leaves more money currently in your accounts to compound. Unfortunately, especially when it comes to retirement income and tax laws, other things are rarely equal.

There are reasons you may want to pay more tax now to enable paying a lower tax rate later. Your objective should not be to pay the least tax. If that's the case, just stick your $ in chequing accounts that pay no interest. Your objective should be to maximize your spending for a given estate value, or conversely to maximize your estate value for a given spending. Specific reasons to withdraw from RRSP or RRIF before the mandated start at age 71 include things like required RRIF withdrawals may push you into a higher tax bracket, or push you into the OAS clawback zone, or to avoid a higher tax rate on deemed disposition at death (for those that want to leave an estate).

Unfortunately as mentioned above, too many people interpret comments like "The solution _may _be to accelerate the drawdown of RRSPs in the decade prior to the RRIF years, or even to set up a RRIF years before it's required", to mean aggressively withdraw from RRSP early and spend it as soon as possible. Withdrawing too much now means paying more tax now, and unless there is a greater reduction of future tax it's not the right choice (IMHO).

For many years while working my MTR was 43%. Then in early retirement years it is 20%, and after age 71 mandatory RRIF withdrawals will push it up to 29%. (Tax rates are approximate rates for Ont.) So RRSP contributions for me seem to have been the right decision. I will withdraw a judicious amount (1-2% annually) from my RRSP/RRIF before age 71 in order to avoid or minimize future OAS clawback, while not pushing me into a higher tax bracket now.

So yes, it's a YMMV thing and everyone should do their own estimates and run their own calculations.


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## gibor365 (Apr 1, 2011)

GreatLaker said:


> Unfortunately as mentioned above, too many people interpret comments like "The solution _may _be to accelerate the drawdown of RRSPs in the decade prior to the RRIF years, or even to set up a RRIF years before it's required", to mean aggressively withdraw from RRSP early and spend it as soon as possible. Withdrawing too much now means paying more tax now, and unless there is a greater reduction of future tax it's not the right choice (IMHO).


You say "Withdrawing too much now means paying more tax now", but author specifically tells
_strategy "Topping up to Bracket," which involves ensuring you receive a yearly income in the range of $12,000 (zero tax) and $42,000 (the lowest tax bracket)._
For example if you have no other income except some interest from HISA/GIC, why not to withdraw RRIF minimum and invest it into TFSA? In any case your tax won't be less in future


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## Eclectic12 (Oct 20, 2010)

gardner said:


> bgc_fan said:
> 
> 
> > This can be mitigated by putting part of the funds into TFSA ...
> ...


True ... but it is a mixed situation with some risks.

More RRSP $$ becoming tax-advantaged dividends means the base income level is climbing, reducing what can be pulled out at the same tax rate.

It is also easy to overlook that that $1 of tax-advantaged dividend counts in the OAS income test as something like 38% more (i.e. $1.38 instead of $1) where the $1 CG counts as $0.50 for the same test.


Nothing terribly hard to plan for but it is easy to miss.




gibor365 said:


> Exactly! Finaly I came accross article that supports my view , usualy all recomendation is to postpone converting to RRIF and start withdraw at 71


Always good to get more details as well as explore ... :biggrin:


Cheers


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## GreatLaker (Mar 23, 2014)

gibor365 said:


> author specifically tells _strategy "Topping up to Bracket," which involves ensuring you receive a yearly income in the range of $12,000 (zero tax) and $42,000 (the lowest tax bracket)._
> For example if you have no other income except some interest from HISA/GIC, why not to withdraw RRIF minimum and invest it into TFSA? In any case your tax won't be less in future


Hypothetical example. Say you need to withdraw $20,000 annually from your RRSP. But you decide to withdraw up to the next tax bracket. In Ontario the MTR up to $42,960 is 20%. Above that, the tax rate increases. So instead of withdrawing $20,000, you withdraw $42,960 (let's round to $43,000 for simplicity). So you are withdrawing an additional $23,000 at 20% tax rate, so because of that additional withdrawal you pay 20% x $23,000 = $4,600 additional income tax. So you have $4600 less in your portfolio to compound and grow. In 10 years at 5% that would compound to almost $7500. But it's money you don't have because you decided to pay tax now instead of later. And that happens every year from early retirement until you exhaust your RRSP. That's a lot of tax now instead of later, and a lot of lost compounding. 

What do you get in return, to make paying that additional tax now worthwhile? As I mentioned above in post #18:


> Specific reasons to withdraw from RRSP or RRIF before the mandated start at age 71 include things like required RRIF withdrawals may push you into a higher tax bracket, or push you into the OAS clawback zone, or to avoid a higher tax rate on deemed disposition at death (for those that want to leave an estate).


But withdrawing from RRSP up to the next tax bracket and paying additional tax now without carefully considering the benefit you can get in the future could be costly. Don't get me wrong, there are reasons to withdraw from and RRSP or RRIF before the mandated age. Just withdrawing up to the next tax bracket is a crude approach unlikely to be optimum.


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## gibor365 (Apr 1, 2011)

I agree with your example, however I was talking about withdraw from RRIF minimum payment that combined with other income won't exceed 0% tax braket.
there are some case when it's beneficial even if you taxes in the lowest ta braket, esp with SRRIF (no attribution rules on min payment). Or when working contributor can invest back into SRRSP proceeds from SRIF min payment... as I indicated with our real example

http://canadianmoneyforum.com/showthread.php/128769-My-retirement-plan-would-like-to-read-feedbacks!


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## GreatLaker (Mar 23, 2014)

There's no magic about the lowest tax bracket. The real test is whether a decision to withdraw from a tax deferred account (RRSP, RRIF, etc) earlier than required by the minimum withdrawal rules will result in paying less tax later and a higher portfolio value when compounding and the time value of money are considered. It works in any tax bracket.


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## heyjude (May 16, 2009)

GreatLaker said:


> There's no magic about the lowest tax bracket. The real test is whether a decision to withdraw from a tax deferred account (RRSP, RRIF, etc) earlier than required by the minimum withdrawal rules will result in paying less tax later and a higher portfolio value when compounding and the time value of money are considered. It works in any tax bracket.


True, but the “penalty” of OAS clawback must be factored in too. Also, consider the type of investments that are in the RRSP. My RRSP has mostly bonds in it. Maybe it will average an ROI of 2-3% over the years. If I withdraw judiciously from my RRSP/RRIF during my 60s while I have a low income, and invest that money in equities in my TFSA or taxable accounts, I may achieve a higher return there, not to mention implementing the equity glide path advocated by Pfau.


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## GreatLaker (Mar 23, 2014)

heyjude said:


> True, but the “penalty” of OAS clawback must be factored in too.


Yes absolutely. I include OAS clawback in "tax". The government would never admit to a clawback, so on the Canada.ca page it is referred to as "Old Age Security pension recovery tax"

It is an important concept to understand. Imagine someone working in Ontario, with income in the range of $93-144k, therefore 43% marginal tax rate, contributing to their RRSP. If they have a DB pension, CPP, and a good sized RRSP their retirement income could be in the $75-85k range therefore in the 31% marginal tax bracket (including mandatory RRIF withdrawals). Now add the 15% OAS clawback to the 31% MTR and the total MTR is 46%. So their tax on withdrawal is higher than the tax savings when they made the RRSP contributions. OUCH!


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## like_to_retire (Oct 9, 2016)

GreatLaker said:


> Yes absolutely. I include OAS clawback in "tax". The government would never admit to a clawback, so on the Canada.ca page it is referred to as "Old Age Security pension recovery tax"
> 
> It is an important concept to understand. Imagine someone working in Ontario, with income in the range of $93-144k, therefore 43% marginal tax rate, contributing to their RRSP. If they have a DB pension, CPP, and a good sized RRSP their retirement income could be in the $75-85k range therefore in the 31% marginal tax bracket (including mandatory RRIF withdrawals). Now add the 15% OAS clawback to the 31% MTR and the total MTR is 46%. So their tax on withdrawal is higher than the tax savings when they made the RRSP contributions. OUCH!


Ouch indeed, I know when I run my tax program, that in five years when my mandatory withdrawals begin, that I will jump to 52% MTR. That includes the clawback that many will say shouldn't be considered, but the reality is when I make $100, I still have to give the government $52. So people can spin that any way they like, it's still a reality. 

I tried many different scenarios to burn down my RRSP after I retired at age 55, but no amount of jiggery-pokey with the figures made withdrawing from the RRSP a better deal compared to the continual compounding inside a tax free account. Everyone's case is different for sure, but as you said, you also have to consider that once you begin mandatory withdrawals from a RRIF, the money you previously removed from the RRSP up until that date would still be in the registered account compounding forward from that date. The magic of tax free compounding is quite powerful.

ltr


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## gibor365 (Apr 1, 2011)

> you also have to consider that once you begin mandatory withdrawals from a RRIF, the money you previously removed from the RRSP up until that date would still be in the registered account compounding forward from that date


In our case "the money you previously removed from the RRSP up until that date would still be" in new SRRIF, back into SRRSP and TFSA


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## Userkare (Nov 17, 2014)

Everyone has different situations. What works for one, could be a disaster for someone else. Who but a fool would blindly follow financial advice?

For me, long before retiring, I spread-sheeted projected income and net liquid worth till age 100. By tweaking a few numbers, I could determine how much I should have left in RRSP when it becomes mandatory RRIF, therefore how much to draw down RRSP between retiring and starting to collect CPP/OAS. The goal was to keep "income" at the lowest tax bracket while still being able to live comfortably on that income plus non-registered savings.

So far, and as long as nothing really catastrophic happens, the spreadsheet is right on track. The only adjustment I needed to make was when my former employer asked me to do some contract work two years in a row; I hadn't allowed for income from self-employment. Not really a problem that upset me though. :^)


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## Mookie (Feb 29, 2012)

Great article Gibor, and great discussion so far. I definitely agree with those that say that this is something that will work well for some, and potentially be harmful for others. Without doing all the calculations, it can be difficult for anyone to know whether this is a good thing or not in their situation.

In my case, early RRSP drawdowns are a key part of my early retirement strategy. When I retire at 55 (in 5.5 years), I expect my only income for the first while to be a modest DB pension of about $20k per year. My wife currently only has an income of about $10k per year of rental income, plus we both have some non-registered investment income. Once I retire, we will use RRSP/RRIF withdrawals to top up our income to the point where it covers our annual living expenses. By the time my larger DB pension kicks in (probably at age 60), and CPP and OAS kick in (between 65 and 70), we should have a good chunk of our RRSPs melted down, which should almost (but not quite) eliminate OAS clawback for us, and keep our MTR balanced between the two of us, and as even as possible from year to year in retirement. 

Like Userkare has done, I have projected this all in a spreadsheet, with income, expense and tax estimates from now until my demise. In our case, my numbers show that paying a little bit more tax in those early retirement years should decrease our lifetime income tax bill by roughly $130k.


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## OnlyMyOpinion (Sep 1, 2013)

like_to_retire said:


> ... in five years when my mandatory withdrawals begin, that I will jump to 52% MTR.


Yikes. I'm guessing you must have a mix of RRIF and nonregistered income sources. We're about 10 yrs till RRIF's and the plan underway is to gift our nonregistered assets so we're just left with RRIF's and CPP/OAS for income at 72. TSFA's and house also remain as assets. 
That gives assets away when they're of most use, and simplifies our affairs as we age. At 72 we'll each have income just under an estimated OAS clawback.


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## gibor365 (Apr 1, 2011)

> When I retire at 55 (in 5.5 years) ....My wife currently only has an income of about $10k per year of rental income, plus we both have some non-registered investment income.


In your case, I'd open SRRSP (or if you have one , convert SRRSP to SRRIF), so you spouse can withdraw minimum RRIF payment with practically no tax. And you can reinvest those SRRIFs cash to invest back into SRRSP...
Actually your situation is similar to ours 
Take a look at my post #22 , would like initiate some usefull discussion....w/o comments like "why do you need planning if your wife gets 200K+"




> in five years when my mandatory withdrawals begin, that I will jump to 52% MTR.


 this is exactly what I'm trying to avoid.... better I'd be taking 20K now and pay 8.7% Average tax rate, as for sure I'll be paying more when I reach 65


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## GreatLaker (Mar 23, 2014)

like_to_retire said:


> I tried many different scenarios to burn down my RRSP after I retired at age 55, but no amount of jiggery-pokey with the figures made withdrawing from the RRSP a better deal compared to the continual compounding inside a tax free account. Everyone's case is different for sure, but as you said, you also have to consider that once you begin mandatory withdrawals from a RRIF, the money you previously removed from the RRSP up until that date would still be in the registered account compounding forward from that date. The magic of tax free compounding is quite powerful.


Similar to my analysis. I have no workplace pension, and my assets are about 50% taxable account, 45% tax-deferred accounts (RRSP/LIRA) and 5% tax-exempt account (TFSA). If I were to draw all my spending money from RRSP/RRIF/LIF I would be in the 31.48% or 33.05% Ontario tax bracket. By drawing spending money from my taxable accounts it is subject to much lower capital gains tax rates, and only the gain is taxed. Say the money in my taxable account is 50% original capital and 50% capital gains. For the same after-tax spending money I could withdraw less, and stay in the lowest tax bracket. Tax on capital gains in that bracket is 10.05%, and since only the capital gains would be taxed the average tax rate would be about 5%.

I do plan on taking a small amount from tax-deferred accounts before age 71, which, depending on rate of return, should allow me to avoid OAS clawback.


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## livewell (Dec 1, 2013)

Userkare said:


> For me, long before retiring, I spread-sheeted projected income and net liquid worth till age 100. By tweaking a few numbers, I could determine how much I should have left in RRSP when it becomes mandatory RRIF, therefore how much to draw down RRSP between retiring and starting to collect CPP/OAS. The goal was to keep "income" at the lowest tax bracket while still being able to live comfortably on that income plus non-registered savings.


I would love to see/understand your spreadsheet construction. I am 58 and recognize the benefit/potential to drawdown our registered accounts before reaching 71. There just seem to be too many variables to try to build a spreadsheet to track this. For the past few years my investment returns have outpaced withdrawals negating any efforts to drawdown the registered accounts (which I think is probably a good thing.)


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## Userkare (Nov 17, 2014)

livewell said:


> I would love to see/understand your spreadsheet construction. I am 58 and recognize the benefit/potential to drawdown our registered accounts before reaching 71. There just seem to be too many variables to try to build a spreadsheet to track this. For the past few years my investment returns have outpaced withdrawals negating any efforts to drawdown the registered accounts (which I think is probably a good thing.)


Well, first of all, my formula is simplified by the fact that I am no longer interested in any investments beyond fixed return GIC/HISA. I know exactly how much each account will return in interest year after year.

The first sheet is a row by row list of accounts grouped together in categories such as.. RRSPs & RRIFs, TFSAs, Non-registered GIC, Daily HISA & Checking. Each row has a column that calculates the anticipated annual interest income. If the interest rate changes during the year, I can amend the interest formula to reflect the changed income for the remainder of the year. Following that is a column for each month in the year; it tracks a month by month running balance for each account. Each category has a sub-total row.

The second sheet starts with a link to the first sheet for the sub-total RRSP amount. Each row of this sheet represents a month and has several years worth of rows, the columns show how much interest will added to the RRSP that month, and how much is planned to be withdrawn until the amount goes to $0. There are yearly sub-totals calculated. I can change the proposed monthly withdrawal amounts to create a scenario projecting the future years' total draw-down.

The third sheet is projected yearly income. Each row is a year starting from the current year till age 100. I delete the top row after tax time for that year. The columns contain all the sources of income such as CPP/OAS, RRSP/RRIF, Interest, and Other income. Most columns are populated by formulas containing links to the accounts sheet and the RRSP draw-down sheet. Changing those other sheets will immediately reflect in the projected income sheet for all future years. The RRIF column uses the CRA minimum withdrawal requirement for a particular age. I can change override that to higher numbers by specifying a global minimum yearly withdrawal amount. The various income source columns are totaled for a gross column figure. I then apply the CRA and ONT formulas for taxes and exemptions to arrive at estimated tax owed, and a net amount. That part is a bit tricky and uses hidden columns for interim calculations. When CRA changes the rules, I need to make changes to my formulas.

So, I will adjust the RRSP draw-down sheet and minimum RRIF amount to make sure the gross income column for each future year stays below the ~$40K lowest tax bracket threshold. It's not super duper fancy, but so far it has been pretty accurate at tax time. I don't have absolute faith in years beyond the next few ( stuff happens! ), but it's nice to see such a long term projection, and convince myself that I have a plan.


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## GreatLaker (Mar 23, 2014)

livewell said:


> I would love to see/understand your spreadsheet construction. I am 58 and recognize the benefit/potential to drawdown our registered accounts before reaching 71. There just seem to be too many variables to try to build a spreadsheet to track this. For the past few years my investment returns have outpaced withdrawals negating any efforts to drawdown the registered accounts (which I think is probably a good thing.)


Steven Brown has a good financial blog with several useful spreadsheets.
http://pabroon.blogspot.ca/p/financial-basics-series.html

His retirement forecaster spreadsheet is really good.
http://pabroon.blogspot.ca/2015/05/retirement-planning-and-forecasting-20.html
http://pabroon.blogspot.ca/p/retirement-spreadsheet.html


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## janus10 (Nov 7, 2013)

GreatLaker said:


> It is an important concept to understand. Imagine someone working in Ontario, with income in the range of $93-144k, therefore 43% marginal tax rate, contributing to their RRSP. If they have a DB pension, CPP, and a good sized RRSP their retirement income could be in the $75-85k range therefore in the 31% marginal tax bracket (including mandatory RRIF withdrawals). Now add the 15% OAS clawback to the 31% MTR and the total MTR is 46%. So their tax on withdrawal is higher than the tax savings when they made the RRSP contributions. OUCH!


This is why we are trying to melt down our RRSPs while in our early 50's. For 2017 I only took out $21k (the entire holdings from a mutual fund RRSP) because I had enough cash in my savings account and a large tax refund to handily cover my expenses. My wife only retired in September and she got a small severance package so she was in pretty good shape. Our non-registered joint account generated about $223k in Capital Gains, and just under $10k in Dividends and negligible interest last year.

Already this year I've taken out $24k from my main RRSP but it still is $50k higher than the balance at the beginning of 2017. It's possible that our RRSPs may continue to grow faster than what we withdraw from them so we'd need to take out more money than is really necessary. We plan on topping up our TFSAs from RRSP withdrawals, plus since we are not contributing to RRSPs any longer, we will have to pay significant taxes on our capital gains - the plan is to again withdraw from our RRSPs to pay off these bills. Once we sell our primary residence we will take the majority of what's left after paying off our HELOC and put it into our non-reg account which will supercharge our main income producing account.

So, our plan would be to have no RRSPs by the time we are 65, but if we would lose all of the OAS anyway due to high income, then there won't be any benefit to exhaust them early.


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## pwm (Jan 19, 2012)

I have been making large RRIF withdrawals prior to taking delayed OAS which started in January this year. My income puts me well into clawback territory so my plan was to have the RRIF reduced to a smaller size before OAS. I delayed OAS for 3.5 years so my monthly payment is $730. Now in 2018 I reduced my RRIF withdrawal to an amount just above the minimum. I wasn't sure how they would handle the situation where you start getting OAS and your previous year's income is above the clawback threshold. I thought that since they don't know what your income will be for this tax year, they might pay the full amount until the next tax return is filed and then reduce the payments at that time, but that's not how it works. 

Here's how it works for those who don't already know. I got a letter from Service Canada on Jan 18 saying that my payment would be reduced by $378 which they call the "Monthly OAS Recovery Tax for Higher Income Seniors". This is based on the income reported on my 2016 tax return. I looked at my 2016 return and the $378 is exactly 15% of the difference between line 234 and the current threshold number for 2017 which is $74,788 just as I expected. So if you are planning to lower your RRIF withdrawals before receiving OAS so as to reduce the OAS clawback, be aware that they use the most recent tax return on file to calculate your clawback. To reduce your OAS clawback you would need to reduce your RRIF payment a year before OAS to get the lowest clawback amount.


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## My Own Advisor (Sep 24, 2012)

I must say, for a early 40-something reading this thread, and you guys worried about OAS clawbacks; taxable accounts making > $200k in capital gains - you have GREAT problems to have in retirement.


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## Dilbert (Nov 20, 2016)

My Own Advisor said:


> I must say, for a early 40-something reading this thread, and you guys worried about OAS clawbacks; taxable accounts making > $200k in capital gains - you have GREAT problems to have in retirement.


My thoughts exactly!:welcoming:


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## mrbizi (Dec 19, 2009)

Dilbert said:


> My thoughts exactly!:welcoming:


Me three. Rich people problems. 

I appreciate the very detailed analysis and discussion though.


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## Koogie (Dec 15, 2014)

My Own Advisor said:


> I must say, for a early 40-something reading this thread, and you guys worried about OAS clawbacks; taxable accounts making > $200k in capital gains - you have GREAT problems to have in retirement.


We'll be there soon enough. I already have white hair in my beard at 44


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