# Advice re RRSPs when turning 71?



## jargey3000 (Jan 25, 2011)

I'm a few years away yet (only 7, sadly..) but I'd appreciate any commentary on planning for this eventuality.
Da wife & I haven't contributed to our plans for a number of years now, mainly cause I think? were in fairly low tax bracket now (we end up paying taxes that are 17% & 12% of our gross incomes - is that low?)
We have approx. $375k in RRSPs now. mostly in fixed income.I also have $80k RIF. We also have maxed-out TFSAs & NON-registered savings/investments.
What questions should i be asking myself to plan for this (assuming I live that long)?
Should we still be contributing? Should we be taking advantage of all the RRSP room we have? Does it ever make sense to start drawing funds OUT of the plans now, at presumably low tax rates .. to avoid possibly higher tax implications at 71?
Would appreciate any advice or strategies for planning for what happens at age 71. Thanks.

sidenote - I can remember someone giving me advice, years ago, when I first started maxing out our RRSP allowance: "Remember, you're only POSTPONING paying tax on this money; you're not ELIMINATING or AVOIDING tax." 
"Yeah, yeah,yeah" I said back then.
Well the proverbial chickens are coming home to roost!


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## heyjude (May 16, 2009)

There is a wealth of information at taxtips.ca, including an RRSP/RRIF withdrawal calculator. 
http://www.taxtips.ca/calculators/rrsp-rrif/rrsp-rrif-withdrawal-calculator.htm

The benefit of an RRSP is that you can contribute while in a high tax bracket and defer the tax until later, when you are in a low tax bracket. Since you are already in a low tax bracket, I don't think it makes sense to add contributions at this stage. In fact, it might be counterproductive, because you might be in a higher tax bracket when you have to withdraw the funds.

Assuming a 2% rate of return, the calculator shows that your minimum withdrawal from your RRSP at age 71 would be 5.28%, or $9495. You could, of course, withdraw more. Everything you withdraw will be taxed as ordinary income. If you are withdrawing larger amounts, that could boost your total income into a high tax bracket. That defeats one of the main purposes of an RRSP. One way around this is to estimate how much room you have in your current tax bracket, and top it up with withdrawals from your RRSP beginning now. For example, if your current income is $75,000 and the next tax bracket begins at $83,000, you could take up to $8000 in RRSP withdrawals while maintaining the same marginal tax rate. (Your average tax rate would increase a little). Financial institutions charge fees (usually $50) for one time withdrawals, so if you can find a number that works, either minimum, constant, or inflation adjusted withdrawals, you can set up an RRIF now and avoid those fees. The other thing to remember is that you don't have to begin withdrawing from your whole RRSP. You can put a chunk of it into an RRIF that will carry you through the next 7 years, and the remainder can stay invested in your RRSP until you are 71.

I am currently using this strategy to draw down an LIRA, which will be gone long before I am 71. Then I will start working on the RRSP. My goal is to smooth the withdrawals and avoid a tax bombshell in later life. Deferred gratification (having too many assets tied up in tax deferred savings) is not always a good thing! But you have to do the math!


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## jargey3000 (Jan 25, 2011)

thanks heyjude. you've kinda summed up my situation too - better that I did!
anyone else care to jump in?


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## Userkare (Nov 17, 2014)

The ultimate goal, I think, is to stay in the lowest tax bracket once you retire. That doesn't mean you have to be dirt poor; it just means that your 'income' is low.

If, while you're earning employment income, you're already in that lowest tax bracket, then it doesn't make a lot of sense to contribute to an RRSP. Like you said, you're just deferring the tax payment to later. If your employment income puts you in a higher tax bracket, then putting away some in an RRSP means you'll reduce your taxes immediately, maybe get a tax refund, and then have some options on how to access the money once you retire. If you wait until age 71 to access it, you'll be forced to withdraw a minimum amount each year.

So, you'll have to decide on when you want to start receiving CPP & OAS, and whether or not you want to withdraw RRSPs before you're forced to convert them to RRIFs. I used an Excel spreadsheet to create scenarios of receiving CPP & OAS at ages 65,66,67, etc. and what the tax effect would be on withdrawing some RRSPs. Again, the exercise was to see how I can stay in the lowest tax bracket. It turned out for me, that it was more advantageous, tax wise, to not collect CPP & OAS until after age 70, but rather to live off of RRSP withdrawals that keep me under the $48K marginal tax bracket. By the time I do turn 71, the remaining amount in RRSP that will be converted to minimum yearly withdrawal RRIFs, will not put me in a higher tax bracket when combined with what I expect to receive from CPP & OAS.

All this, of course, is dependent on each individual's lifestyle and anticipated expenses in retirement. Also, the government may suddenly change the rules, like you know... people who have $10K at the end of the year to put into a TFSA are evil rich people and need to be punished for their opulence. Who knows, they might come after your hard-earned RRSPs next; Sophie needs to hire extra help, after all.


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## Islenska (May 4, 2011)

A hidden negative is your estate must take out your RRSP in a lump sum,,,,when you fly the coop, now that is a tax hit.

I contributed last year (age 62), $10K, just because but not sure going forward, too bad our generous TFSA is crimped....


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## heyjude (May 16, 2009)

Islenska said:


> A hidden negative is your estate must take out your RRSP in a lump sum,,,,when you fly the coop, now that is a tax hit.


......unless there is a spouse beneficiary. But when the second spouse dies, the tax becomes due in one fell swoop.


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## My Own Advisor (Sep 24, 2012)

I'm a long ways away from thinking about this for our purposes...but here are my thoughts...

I think the decision to wind down the RRSP really depends on when you want to take CPP & OAS, as referred to above. Where possible, you want to avoid any OAS clawback.

Our plan is to deplete the RRSP before 71. This is because we want to move tax-inefficient money to tax-efficient money as soon as possible (RRSP to non-reg. dividend paying stocks or TFSA ideally).


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## steve41 (Apr 18, 2009)

This is a bit long-winded and old (the proposed TFSA was called the TPSP in 2005) but mostly still holds....

Indexed Brackets and the RRSP (The RRSP as tax avoidance)
===================

Something interesting happened to the RRSP when no one was looking.

It was several years ago when Paul Martin announced that the tax brackets would be indexed to inflation. Tax on 50K is currently $11.2K - and it would have remained at $11.2K each and every year, had Mr. Martin not made his announcement. Now, if inflation runs at 2%, tax on $50K in 10 year’s time will be $9.7K and in 20 years $8.5K, $7.9K in 30, $7K in 40 years. At 3% inflation, tax after 60 years will be just $1,000.

This is well and good; most commentators have given him credit for finally eliminating the dreaded ‘bracket creep’.

The ‘interesting thing’ that happened however, was the effect it had on the RRSP. The nature of the RRSP/RRIF investment paradigm (which was developed in the days of bracket creep) is that you receive a near-term tax break which is offset later on by a far-term tax hit. The argument which is made is that care should be taken when investing in your RRSP in case it gets too large and you are saddled in old age with a huge RRIF and commensurately, large tax bills at high marginal rates.
Many financial advisors caution their clients to save outside their RRSP (in dividends and/or capital gains instruments) so as to mitigate those future large taxes.

Once the new rules (indexed tax brackets) were put into RRIFmetic; I began to play around with the issue: "Can a case still be made to invest outside your RRSP?” I have to tell you, when you take into account the fact that:

1. Taxes are lower in retirement (age 65 credit, $1000 pension tax credit).
2. The above-mentioned fact that the tax brackets are now indexed, and especially…
3. The ‘time-value of money’ effect (i.e. the size of the tax paid in 2030 has to be looked at in present-value terms)
...then the case for saving outside the RRSP is hard, if not impossible to make.

What got me thinking about this was the ongoing media hype surrounding the TPSP. It turns out that you can very easily mimic the TPSP using RRIFmetic. This eliminates tax completely from the nonregistered investment entity. No tax on growth (friction) nor on withdrawals.

A casual observer would think that if we eliminated tax completely using the TPSP then there would be an even stronger case for investing outside the RRSP.

Well… guess what? It doesn’t. In fact, when you divert all or some of your savings to that as yet hypothetical TPSP, your after-tax lifestyle (ATI) will be disadvantaged! I have run this for a 30 year-old 20K wage earner, up to a $90K wage earner (which covers off a pretty large part of the working cohort)….., the RRSP will outperform the TPSP every time. As you get down in income (low wage-earners), you may suffer from the effect of GIS clawback and at the very high-end the OAS will get clawed back; but even then, the TPSP advantage is quite small.

Any one who is trying to make a case for the TPSP would be well advised to re-thinktheir case, especially in light of the new RRSP foreign content rules. (It is hard to find out from the US what the popularity of the Roth IRA is, and this very
well could be the explanation…. it just doesn’t compute, ATI-wise)

BTW.... Spreadsheets and ‘average tax rate’ programs can’t do this type of calculation.

From an after tax perspective then, the RRSP is better than the ‘good old days’: that time
when there was no personal tax on investments of any kind.

Conclusion….the RRSP is in fact; not a tax deferral, it is a (very) slight tax avoidance.

BTW, a case (small) can be made for an ‘outside the RRSP’ strategy when you consider the estate. If you die prematurely, an ‘outside the RRSP’ strategy may slightly benefit the estate.

Steve Salter

March 30, 2005


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## Islenska (May 4, 2011)

Also anyone putting away some cash is good, RRSP. TFSA, non-reg

Tax planning probably overblown a bit-------------the savings angle is the clincher, esp for starters.


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## Jaberwock (Aug 22, 2012)

To minimize taxes, only contribute to your RRSP if you will be in a lower tax bracket when you retire than you are in now.

I have attached for your reference, the marginal tax brackets for Ontario for people under 65, and for seniors subject to age amount and OAS clawback. You will see that marginal tax rates in the middle income brackets go up when you turn 65, even though you pay lower taxes. In Ontario you need to also consider the Ontario Seniors Home Property Tax Grant which adds another 3.3% to your marginal tax rate at income levels between $30k and $50k (based on you and your spouses combined income).

Consider turning your RRSP into a RRIF at 65, because you can then split any withdrawals with your spouse to keep yourself out of the higher brackets. Keep your TFSA's topped up to the maximum. If necessary, draw money out of RRSP/RRIF and put it into your TFSA. Figure out what your income is likely to be in retirement, and plan to always stay below the OAS clawback limits.

100% fixed income is very conservative. You can afford to take more risk. What do you have in your non-registered investments?


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## steve41 (Apr 18, 2009)

Jaberwock said:


> To minimize taxes, only contribute to your RRSP if you will be in a lower tax bracket when you retire than you are in now.


 This is very unlikely to happen. I have seen many, many financial plans, and almost none of them experience higher effective tax rates once retired.


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## Jaberwock (Aug 22, 2012)

steve41 said:


> This is very unlikely to happen. I have seen many, many financial plans, and almost none of them experience higher effective tax rates once retired.


It would be unusual, but not as unlikely as you think.

Take someone earning $130k/yr, and dropping to $90k after retiring at 65. After accounting for clawbacks, that person would move from a 43.4% bracket before retirement to a 51.9% bracket afterwards. 

In Ontario, someone earning $70,000 before retirement and dropping to $46,000 after, would move into a higher effective marginal tax bracket.


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## AltaRed (Jun 8, 2009)

I, for one, disagree with the 'label' of higher effective tax rates due to clawbacks. For anyone that is middle class or above (with the means to have a fruitful retirement on their own financial power), these 'social' programs are graft provided by governments over time to buy votes. Why should there be an age amount over, for example, $50-60k? Why should there be OAS for anyone over similar amounts? Seniors with that kind of cash flow do not need social assistance. I am clawed back on all those things but I sure would not measure my effective tax rate with clawback effects included. I am grateful that I don't receive social welfare.

That said, if people can take advantage of cash flows to extract as much as they can from these programs, I do not argue with that either. I simply argue with it being looked at as 'higher tax rates' when retired, and I detest outfits like CARP, etc. whine about how poorly seniors are treated, especially middle class and above seniors.


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## james4beach (Nov 15, 2012)

Jaberwock said:


> Take someone earning $130k/yr, and dropping to $90k after retiring at 65.


I'm very far from retirement but can someone help me understand what kind of scenario leads to this situation that's quoted? I ask because I have something like the former income and would love to drop to 90K after retiring... how is this accomplished? Is this when you work for a govt job and have pensions?

How can I position myself to end up with that 90K income after retirement?


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## heyjude (May 16, 2009)

steve41 said:


> This is very unlikely to happen. I have seen many, many financial plans, and almost none of them experience higher effective tax rates once retired.


Well, I'm an exception. My situation is complicated by a holding company, but if I leave all my tax sheltered investments to accumulate till I am 71, I will immediately leap to the highest tax bracket. Not going to happen!


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## AltaRed (Jun 8, 2009)

J4B, it should not be hard to do if one has a good paying career at circa $130k. At that income*, one should end up with an investment portfolio (RRSP/TFSA/non-registered) in the $1.5 million range. A 4% yield on that portfolio (high dividend yield stocks, REITs, Prefs, bonds, GICs) gets you 2/3rd of the way there. Add CPP, some (unclawed back) OAS and a bit of capital** from the portfolio, and voila..... $90k pre-tax.

* Putting away $40-50k per year from that $130k gross over a 20 yr period (as an example).

** May not even be capital drawdown. May be just harvesting capital appreciation.


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## james4beach (Nov 15, 2012)

Oh I see, people are including accumulated investments when they talk about "high income after retirement". I had not understood that, I thought it meant some kind of external income source.

Yes I agree it should be possible to accumulate something near $1.5 million, assuming no disasters like ex wives/major legal trouble


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## fraser (May 15, 2010)

I am a huge fan of tax planning. We have been able to avoid a considerable amount of tax simply by dealing with a tax professional, understanding the rules, and structuring our finances accordingly. 

I think that it pays to do some basic research and understand how the tax regime applies to your situation. Our tax situation is changing substantially this year after five years of early retirement. Tax avoidance has paid for some very nice vacations for us. Now, as our situation changes and we approach 65, and of course the age 71 rule for RSPs we are in the process of looking at potential tax situations through to age 71. We have started the process. 

Everyone's situation is slightly different with regard to pension splits, age amounts, RSP's,RIf's, Lifs etc so it would be well worth you time to gain an understanding of the rules and then do some pro forma calculations into the future using different scenarios. There are lots of resources/information available on line in the library. Not to mention all the subject matter books available in bookstores/on line bookstores. We review our situation twice a year. Once in early November to determine if we need to action anything prior to the end of the tax year. After completing our tax returns in April we look forward to ensure that we are still on the right path.

Once you have a sense of what might work for you it could be very worthwhile to spend some time with a tax professional or financial planner knowledgeable in this area. The small amount of fees that we have paid for advice/direction in this area over the past ten years have been one of our best investments. The more organized you are and the more knowledgeable you are prior to an advice session the less time it will take. Less time usually translates into less fees. Plus, we are no longer left with a lingering doubt that we might have missed an opportunity to structure our finances in a more advantageous manner simply because we did not know any better!


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## steve41 (Apr 18, 2009)

Just ran a quick example....

63 yo with gross salary of 150K retires at 65. He currently has 1M in RRSP and 1M in nonreg.

His tax rate is currently 32%. As soon as he retires it drops to 16%, at 71 pops up to 23% and stays that way til death.

In BC with full CPP and OAS.


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## steve41 (Apr 18, 2009)

Just gave him a $60K pension, and his post retirement eff tax rate is still less than his pre retirement rate.


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## My Own Advisor (Sep 24, 2012)

Further to a comment above, I don't think there should be any OAS for any senior earning $70k+ per year. There is no need for social financial assistance at that level (or above). 

Our goal is to earn about $60k post-tax in retirement, in today's dollars. That will be good enough for us (without debt).


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## Jaberwock (Aug 22, 2012)

steve41 said:


> Just ran a quick example....
> 
> 63 yo with gross salary of 150K retires at 65. He currently has 1M in RRSP and 1M in nonreg.
> 
> ...


I don't know where you are getting your numbers from.

In BC on a $150k income his marginal tax rate would be 43.7%

Assuming he retires with full CPP and OAS, that is $20k, draw down the RRSP at 3% (he would have to draw down at more than 3% once he turns 71) adds another $30k. Assume he is invested his $1 million non reg in a mix of fixed income and dividend paying stocks returning an average of 3.5%, that is another $35k. Total income after retirement is now $85k, add another $5k for gross up of dividends and he has entered the 51% marginal tax bracket (after accounting for OAS clawback)

We started this thread with a question about whether or not a 64 year old should continue to contribute to his/her RRSP. That decision adds or subtracts incremental income now or in the future, it has to be based on marginal tax rates, not overall tax rates


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## Jaberwock (Aug 22, 2012)

My Own Advisor said:


> Further to a comment above, I don't think there should be any OAS for any senior earning $70k+ per year. There is no need for social financial assistance at that level (or above).
> 
> Our goal is to earn about $60k post-tax in retirement, in today's dollars. That will be good enough for us (without debt).


You could look at the claw-back of OAS as a means of eliminating a subsidy to the more wealthy members of society. You could also look at it as a penalty on those who have managed their money frugally and have saved for their own retirement, and a subsidy to those who have spent frivolously during their working life.


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## steve41 (Apr 18, 2009)

Tax (amount) is what counts. The marginal tax rate has no meaning. The optimum financial plan is one in which the PV of all future tax amounts is minimized.


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## Jaberwock (Aug 22, 2012)

steve41 said:


> Tax (amount) is what counts. The marginal tax rate has no meaning. The optimum financial plan is one in which the PV of all future tax amounts is minimized.


In the case of a decision for a 64 year old to contribute to an RRSP, that is not correct.

If you have for example, an income of $50k, and you are making a financial decision that will deduct $10k from your present taxable income, and add $10k to your future taxable income then the marginal tax rates now and in the future will determine how much tax you save or pay on that incremental $10k of income.


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## steve41 (Apr 18, 2009)

There is only one measure.... the amount you get to keep (after tax) and spend on beer and groceries each and every year.


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## Islenska (May 4, 2011)

heyjude, my situation is similar to yours,

Would you draw RRSP first then Holdco for later years? (Use up RRSP before 71 mainly)


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## Jaberwock (Aug 22, 2012)

Islenska said:


> heyjude, my situation is similar to yours,
> 
> Would you draw RRSP first then Holdco for later years? (Use up RRSP before 71 mainly)


That depends what is in Holdco. Return of capital or return of shareholder loan can come out tax free. Dividends from Holdco would be grossed up and a dividend tax credit applied, so that may push you up into a higher bracket later in life.
Also, if Holdco has been paying part IV tax on passive investments, there is a tax credit that goes into Holdco. You need an accountant for that one.


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## Islenska (May 4, 2011)

HoldCo currently has a Capital Dividend account of $500K that can come out tax free, (I have done a bit already)

My accountant advises using up the HoldCo first (currently $1.2 mill) then RRSP ($950K) thereafter

Age 62 and say $100K gross a year, not sure the route currently, maybe a bit of both?


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## heyjude (May 16, 2009)

Islenska said:


> heyjude, my situation is similar to yours,
> 
> Would you draw RRSP first then Holdco for later years? (Use up RRSP before 71 mainly)


A bit of both, actually. A chunk of RRIF, plus a dividend from Holdco calculated to minimize corporate tax while keeping yours truly in a low tax bracket. Intermittent tax free dividends from CDA. My RRSP is considerably smaller than yours.


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