# Too much money in your RRSP?



## Tostig (Nov 18, 2020)

When you die, whatever is left over in your RRSP or RRIF goes to your surviving spouse. However, when your surviving spouse dies, all remaining funds are taxed at the full marginal income rate.

Well, we all like to leave a little behind for the next generation but having too much money left over could mean a big one-time final hit at a very high tax bracket. (I remember my severance on retirement boosted my income to the highest tax bracket for that year only.)

Not only should you be concerned about that, the annual required RRIF withdrawal rate might force you to take a larger retirement income than what you may feel comfortable. If you can maintain a lifestyle in the certain tax bracket, you shouldn't be paying taxes on anything higher.

So has anybody come up with the optimum RRSP value at the age of 65 to maintain in the lowest tax bracket through to 90 with just enough remaining to be also taxed at the lowest tax bracket?

I'm going to do a spreadsheet analysis to see how it turns out. I'm going to assume 2.5% creeping tax bracket increase based on inflation.

Yes, I know there may be a lot of other variables but let's see if I can come up with something basic.


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## bgc_fan (Apr 5, 2009)

Tostig said:


> So has anybody come up with the optimum RRSP value at the age of 65 to maintain in the lowest tax bracket through to 90 with just enough remaining to be also taxed at the lowest tax bracket?


I guess you can take into account OAS clawback as the target (around $80k). But why use 65 instead of 71 which is the age that you have to collapse your RRSP and forced to take out RRIF contributions?


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## AltaRed (Jun 8, 2009)

Hard to know where to begin responding with a thought process like this? Optimum RRSP level is all over the map depending on one's other income from CPP, OAS, taxable portfolio, maybe DB pension as well, and when do you know this information? Age 40? 50? 60?

I suppose one could buy enough Porsche Carrera 911s to deplete one's finances enough before RRIFing kicks in at some age but why does one want to be a retired pauper? Living near the ceiling of the lowest tax bracket is not exactly a comfortable retirement.


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## Beaver101 (Nov 14, 2011)

^^^


> So has anybody come up with the optimum RRSP value at the age of 65 to maintain in the lowest tax bracket through to 90 with just enough remaining to be also taxed at the lowest tax bracket?


 ... the difference between your RRSP value on withdrawal (RRIF?) and the lowest tax bracket income from all sources. I think basically, don't bother contributing to the RRSP from day 1.


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## GreatLaker (Mar 23, 2014)

As AR said, it will be different for everyone depending on factors like CPP, OAS, pensions, marital status.... If you increase spending and burn your assets too low you risk running out of money. If you move too much money out of your RRSP to non-reg account (assuming you are already maxing your TFSA) then you will incur dividend and capital gains taxes on your non-registered account, that you would not have to pay on an RRSP.

I look at it from a perspective of how much can I spend from my portfolio given a specific after-tax estate size. Or conversely, what is the maximum after-tax estate given a specific spending rate.

Things to watch for are: high mandatory RRIF withdrawals resulting in OAS clawback starting at age 71, higher taxes when one spouse passes away and the RRIF passes to the surviving spouse driving higher taxes, and high lump-sum tax on the disposition (or deemed disposition) of the estate. One approach is to begin RRSP/RRIF withdrawals on retirement, before age 71, to lower the value lessening the tax impact. Pay a little more tax now to avoid even more tax later.

This article gives some further analysis. The tax rates are from AB a few years ago, and it does not address TFSAs but I think the basic principles are still applicable now.
Which Account Should I Draw First In Retirement?


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## Eclectic12 (Oct 20, 2010)

Tostig said:


> When you die, whatever is left over in your RRSP or RRIF goes to your surviving spouse. However, when your surviving spouse dies, all remaining funds are taxed at the full marginal income rate.
> 
> Well, we all like to leave a little behind for the next generation but having too much money left over could mean a big one-time final hit at a very high tax bracket ...


One of my parent's methods to deal with this a bit was that when they felt there was an excess to the point of being comfortable getting rid of it, they take an optional extra amount then give it to us kids.
I can recall at least three rounds of this.




Tostig said:


> ... So has anybody come up with the optimum RRSP value at the age of 65 to maintain in the lowest tax bracket through to 90 with just enough remaining to be also taxed at the lowest tax bracket?


This sounds like an almost impossible goal.

Where one has a concern about too large an RRSP ... won't aiming to stick to the lowest tax brackets (i.e. low income from all sources with some help from deductions/credits) help make sure the RRSP/RRIF remain big?

The rollover from a spousal death would make it worse, assuming the spouse sticks to low tax brackets.




Tostig said:


> ... I'm going to do a spreadsheet analysis to see how it turns out. I'm going to assume 2.5% creeping tax bracket increase based on inflation.
> Yes, I know there may be a lot of other variables but let's see if I can come up with something basic.


Looking forward to it ... but those variables can make a world of difference. One co-worker has a medium RRSP, medium DB pension and about 70% of max CPP while another has a big RRSP, big DB pension and about 90% of CPP. There's a third co-worker who plans to start the DB pension years down the road as they figure their RRSP is too big where they want to draw it down before starting the DB pension.


Cheers


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## STech (Jun 7, 2016)

"Don't let the tax tail wag the investment dog".


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## fireseeker (Jul 24, 2017)

Tostig said:


> When you die, whatever is left over in your RRSP or RRIF goes to your surviving spouse. However, when your surviving spouse dies, all remaining funds are taxed at the full marginal income rate.
> ...
> So has anybody come up with the optimum RRSP value at the age of 65 to maintain in the lowest tax bracket through to 90 with just enough remaining to be also taxed at the lowest tax bracket?


It's hard to see how there can be an optimum RSP value. The problem reveals itself in Year 1: If your RSP grows by 10% you'll suddenly be overshooting that value. If the account falls by 5% you'll suddenly be undershooting. 
In other words, you'll have to adjust withdrawal amounts year-by-year to respond to returns. This is true regardless of how big or small the RSP is.

The more important point, IMHO, is that per the citation above you seem too focused on the lowest marginal rate (optimal) and the full marginal rate (disaster). 
In Ontario, the lowest rate tops out at about $45,000. The top rate kicks in at about $200,000. 
But there are lots of points in between -- 155,000 of them! ISTM, that one ought to do as described above: adjust each year based on age, recent returns, RSP total and the health of the couple. Lots of variables.

This might mean you miss the optimal arrangement, and wind up one year having incomes of $60,000, paying second-bracket tax on part of it. If both of you get to age 85 and there is still lots in the RSP, maybe you push the incomes to $100,000 -- still well short of the top bracket.

I am intrigued to see what you come up with as a magic bullet amount. But I think you're going to have to adjust each year anyway.


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## gardner (Feb 13, 2014)

GreatLaker said:


> Things to watch for are: high mandatory RRIF withdrawals resulting in OAS clawback starting at age 71, higher taxes when one spouse passes away and the RRIF passes to the surviving spouse driving higher taxes, and high lump-sum tax on the disposition (or deemed disposition) of the estate. One approach is to begin RRSP/RRIF withdrawals on retirement, before age 71, to lower the value lessening the tax impact. Pay a little more tax now to avoid even more tax later.


FWIW, this is the approach I am taking. I'm still under 60, but I have a RRIF and transfer a little of my RRSP over and take it out. This is with an eye to gradually drawing down the RRSP before any of the forced withdrawal situations kick in.

The advise to not let the tax tail wag the investment dog is sound though: the objective is to maximize the amount of cash you have to spend, not necessarily minimize taxes. You have to look at what strategy yields the most after tax income. One that yields 1M after tax, but pays 500K in taxes is still better than one that yields 500K and pays no taxes. Sticking it to the man is not your goal. Having money to spend is.


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## peterk (May 16, 2010)

I think the only way to answer these questions is to do a full blown cashflow and tax analysis at the right moments in your life. Probably around age 50 it's worth knowing the answer to the question "should I keep contributing to my RRSP?" and at age 60 "when and how much should I take out of each of my accounts?" 

There's no way to know the answer without the whole thing being done out. Unless you are an absolute Excel whiz and very, very meticulous, it's probably worth getting an accountant with their professional Excel tables and software to do it correctly.

That steve guy on here with his RRIF metric used to do that I think? Maybe he's still around.

That said, I _think_ the answer almost all the time is "always defer taxes as much as possible into the future" Except for those rare cases where your employment income in your 50s/60s is somehow only as much or lower than your expected retirement income. Perhaps this could be true of people who inherit a lot of money, or have worked for the government since age 18, or have had very high investment returns on their savings from a middle-class salary.


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## Retired Peasant (Apr 22, 2013)

Tostig said:


> When you die, whatever is left over in your RRSP or RRIF goes to your surviving spouse. However, when your surviving spouse dies, all remaining funds are taxed at the full marginal income rate.
> 
> Well, we all like to leave a little behind for the next generation but having too much money left over could mean a big one-time final hit at a very high tax bracket.


To be blunt, you're dead, what does it matter. OK maybe you want to leave lots to your kids, but remember an inheritance is a gift, not an obligation. Perhaps they should be independent and build their own wealth, and not expect it from you?

If you abhor the govt. getting it, consider leaving some $$ to charity in your will; you might not pay any taxes on death.


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## afulldeck (Mar 28, 2012)

Retired Peasant said:


> To be blunt, you're dead, what does it matter. OK maybe you want to leave lots to your kids, but remember an inheritance is a gift, not an obligation. Perhaps they should be independent and build their own wealth, and not expect it from you?


No it is reparations for given them the screwed up tax system.


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## Spudd (Oct 11, 2011)

peterk said:


> That steve guy on here with his RRIF metric used to do that I think? Maybe he's still around.


Unfortunately he passed away. But I recall his usual response was that it's almost always best to leave as much as possible in the RRSP.


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## AltaRed (Jun 8, 2009)

Too much attention is given to the tax tail.


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## afulldeck (Mar 28, 2012)

AltaRed said:


> Too much attention is given to the tax tail.


Why do you say that? Tax drag has the biggest impact on everyone's retirement savings. Shouldn't it be the most important thing we correct for?


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## fireseeker (Jul 24, 2017)

afulldeck said:


> Tax drag has the biggest impact on everyone's retirement savings.


This is a statement of fact. What's the evidence for it?


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## AltaRed (Jun 8, 2009)

afulldeck said:


> Why do you say that? Tax drag has the biggest impact on everyone's retirement savings. Shouldn't it be the most important thing we correct for?


I am talking about things like:
1) not trimming winners due to cap gains taxes, aka Nortel
2) jumping through hoops to deplete a RRIF and pay taxes early during one's 60s to avoid a 15 cents on the dollar claw back of OAS
3) fretting about high taxes upon death due to collapse of portfolios (can be solved with 'securities in kind' donations)
4) the example of this thread to try to keep a RRIF 'small' to stay within lowest tax bracket

There are so many non-productive hoops people go through to avoid some taxes. I would gladly double the taxes I pay, if I also got to keep the bulk of the winnings in my own pocket.

Anecdote: Had a FIL back in the '70s and '80s who would not put his savings in GICs at much higher interest than a bank savings account because he was going to pay more in taxes to the government. The fact he would have kept perhaps 80 cents on the dollar in his own pocket was lost on him. I gave up beating my head on the door jambs.


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## afulldeck (Mar 28, 2012)

fireseeker said:


> This is a statement of fact. What's the evidence for it?


So a MER on your investment is greater than your taxes?


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## afulldeck (Mar 28, 2012)

AltaRed said:


> There are so many non-productive hoops people go through to avoid some taxes. I would gladly double the taxes I pay, if I also got to keep the bulk of the winnings in my own pocket.


I wouldn't say double, but I get your point. I would add though, it's not "winnings" but "hard earned risked capital". Winnings makes it sound like you didn't sacrifice for it when in fact you did.


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## AltaRed (Jun 8, 2009)

afulldeck said:


> I wouldn't say double, but I get your point. I would add though, it's not "winnings" but "hard earned risked capital". Winnings makes it sound like you didn't sacrifice for it when in fact you did.


Fair enough. The point is not to be counter-productive trying to minimize taxes at the expense of putting more jingle in one's own pocket.


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## fireseeker (Jul 24, 2017)

afulldeck said:


> So a MER on your investment is greater than your taxes?


That's certainly one thing. Costs compound over time, in a devastating way. 

Another is asset allocation. And over-trading. And savings rate.

IMHO, taxes are the least of an investor's concern -- even OAS clawback. Most people would kill to be in clawback territory -- because it means they're bringing in more than $80,000 a year!


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## GreatLaker (Mar 23, 2014)

Keeping money in a low interest savings account instead of GICs (at least back before all the online banks started offering better rates) to avoid paying more tax, while actually ending up with less money is the tax tail wagging the investment dog. But why not at least engage in some intelligent tax planning to try to minimize your taxes. 

One thing to remember about RRSPs and RRIFs is the second R = retirement. They are not registered estate saving plans or registered inheritance saving plans. They are taxed as a disposition on death, so could easily push the deceased into a very high tax bracket. 

Some of the things I stated upthread in post #4 can be done to lower the tax burden, therefore getting more after-tax dollars out of the same pre-tax savings. The problem is they are hard to analyze, especially with the vagaries of tax rates, investment returns and lifespan. If I withdraw funds for living expenses from my non-registered account I pay low taxes: capital gains at half my marginal rate on the capital gains only. If I withdraw from my RRSP/RRIF I pay tax at my full marginal rate, therefore I need to withdraw more pre-tax to meet my after-tax needs, leaving less in my account to compound. But conversely, if I take all my spending needs from my non-registered account my RRSP/RRIF will grow a lot, pushing me into a higher tax bracket at age 71 when mandatory RRIF withdrawals start, pushing me to have all my OAS clawed back. So I take some funds from my RRSP every year with the intent to lower my overall lifetime tax burden, and increase my after-tax assets.

People say "why worry about OAS clawback?" Sure, for someone with retirement income of $150k, OAS clawback is a blip, and unavoidable. But what about someone that is retired at 60, expecting to have some OAS clawback in the future? If they could carefully plan their taxable withdrawals now to avoid that later, ending up with more money, why not do it?

I think the OP's focus on being in the lowest tax bracket is the wrong approach. You want to achieve the highest after tax income when alive, for a given after-tax estate size. Not easy to do, unless you are a spreadsheet expert or have access to financial and tax-planning software like NaviPlan. But the basic fundamentals are not that hard to understand.

(Although I am appreciative of people that do not seem to care about this stuff... the extra tax they pay will lessen the likelihood of the govt having to raise tax rates)


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## agent99 (Sep 11, 2013)

There are so many variables, there can be no simple plans.

For one reason or another, when I decided to retire at 64, we had accumulated a lot more in our registered accounts than in unregistered. That was 16 years ago.

After professional/business income ended at 64, our taxable income dropped, so we converted some RRSP money to RRIFS and withdrew from those until we reached 72. This was an attempt to draw down our registered. We drew just enough to keep us at a median tax rate - less than the max. Maybe 33-35%. Helped a little, but with income and growth, RRSP value hardly changed. 

At 72 we had of course to convert the remainder of the RRSPs to RRIFs. Since then we have both been drawing the Min required based on wife's age (2 yrs younger). After withdrawing for 8 years, our 7 figure RRIFs are still over 50% of our overall portfolio . Income and growth within RRIFs almost equal our present ~6.5% withdrawal rate. By the time I am 90, our rate will be about 10%. But as RRIFs are drawn down, that will be a % of an ever reducing amount. Don't let percentages confuse you! Actual $$ withdrawn may not be that much higher.

Despite RRIF withdrawals+CPP+OAS+unregistered income (mostly dividends), our taxes are no big deal. We are able to use income splitting and that helps a bit. Our overall average tax rate for 2019 was 13.5% of our taxable income. Doesn't seem much considering we get to live in one of the best countries in the world!

I wouldn't waste time trying to minimize taxes. We have a high registered:unregistered ratio, yet, as described, we just get to pay taxes at what we consider a very fair rate.


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## GreatLaker (Mar 23, 2014)

Say someone is 65 and getting ready to retire. Their marginal tax rate is 40% and they expect that to drop to 30% when they retire. So they make a last RRSP contribution, avoiding tax at 40% MTR, then paying tax at 30% MTR when they withdraw. Great deal right? Save 10% by deferring taxes via a RRSP. 

But now consider that their income is such that all of the RRSP withdrawal will be at an income level subject to OAS clawback at 15%. So instead of 30% MTR when they withdraw, the MTR including OAS clawback is actually 45%. So they paid an extra 5% tax by making that RRSP contribution. Lots of middle income people make that mistake, which could easily be avoided by some tax planning.


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## like_to_retire (Oct 9, 2016)

GreatLaker said:


> People say "why worry about OAS clawback?" Sure, for someone with retirement income of $150k, OAS clawback is a blip, and unavoidable. But what about someone that is retired at 60, expecting to have some OAS clawback in the future? If they could carefully plan their taxable withdrawals now to avoid that later, ending up with more money, why not do it?


I agree. The range that OAS clawback effects your marginal tax rate is quite wide and applies to a large number of those in the middle class. 

For every new dollar you earn between $77,580 and $126,058 there is an extra 15% added to your tax paid at year end. So if your marginal tax rate was was 37% in that range without OAS considerations, it now becomes 52% until you pass the upper threshold.

I don't see any problem trying to minimize the government taking over half of every extra dollar you earn. This is a reality of the situation, regardless whether people like to make speeches about who deserves government handouts or not.

ltr


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## fireseeker (Jul 24, 2017)

GreatLaker said:


> Say someone is 65 and getting ready to retire. Their marginal tax rate is 40% and they expect that to drop to 30% when they retire. So they make a last RRSP contribution, avoiding tax at 40% MTR, then paying tax at 30% MTR when they withdraw. Great deal right? Save 10% by deferring taxes via a RRSP.
> 
> But now consider that their income is such that all of the RRSP withdrawal will be at an income level subject to OAS clawback at 15%. So instead of 30% MTR when they withdraw, the MTR including OAS clawback is actually 45%. So they paid an extra 5% tax by making that RRSP contribution. Lots of middle income people make that mistake, which could easily be avoided by some tax planning.


You are describing somebody with $80,000 in retirement income (from pensions, CPP, OAS and investments) _even before touching their RRSP/RRIF_. That is not a middle-income person.

The median income for Canadian individuals over 65 in 2018 was $29,700. So this person has nearly triple the median income, plus they have registered savings and, presumably, TFSAs.


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## like_to_retire (Oct 9, 2016)

fireseeker said:


> The median income for Canadian individuals over 65 in 2018 was $29,700. So this person has nearly triple the median income, plus they have registered savings and, presumably, TFSAs.


You Now Have To Make $135K A Year To Be Considered Middle Class In Toronto.

It all depends where you live. I would guess middle class to be about $35,000-$135,000 depending on your home base. It's a wide range. The tax rules don't really take this into account.

ltr


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## bgc_fan (Apr 5, 2009)

like_to_retire said:


> You Now Have To Make $135K A Year To Be Considered Middle Class In Toronto.
> 
> It all depends where you live. I would guess middle class to be about $35,000-$135,000 depending on your home base. It's a wide range. The tax rules don't really take this into account.
> 
> ltr


That's nothing, you have to make $400k a year to be considered middle class in the USA. Joe Biden defines income of $400,000 as ‘wealthy,’ but here’s why it’s barely scraping by for some

The problem with these type of "studies" is that they've defined middle class as a certain lifestyle rather than based on income, so you're going to see a wide discrepancy of middle class examples. The obvious big one is housing: defining middle class as OWNING a freehold townhome. Then if you are renting, or owning a condo, in line with someone's salary, then you're no longer middle class, by their definition that they are using. But, there's a least a third of the households live in rental housing. So by that definition alone, at least 30% of the families are lower class. That alone is going to inflate the income level for a middle class household.


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## fireseeker (Jul 24, 2017)

like_to_retire said:


> You Now Have To Make $135K A Year To Be Considered Middle Class In Toronto.
> 
> It all depends where you live. I would guess middle class to be about $35,000-$135,000 depending on your home base. It's a wide range. The tax rules don't really take this into account.
> 
> ltr


Great Laker was talking about a retirement-age individual. The $135k comparison is different.

The blog post that the link above is based on is about a young family who own a home in Toronto. Note what it says at the end:



> A traditional middle class lifestyle assumes: (1) two spouses and a child and the ability to finance that child’s education; (2) home and vehicle ownership; (3) the ability to save for retirement.
> In Toronto, the aforementioned lifestyle would require an after-tax income of $123,388 per year.
> This middle class lifestyle was common and available to many people 30 years ago. Today it’s only available to the top 10% economic class.


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## afulldeck (Mar 28, 2012)

agent99 said:


> After professional/business income ended at 64, our taxable income dropped, so we converted some RRSP money to RRIFS and withdrew from those until we reached 72. This was an attempt to draw down our registered. We drew just enough to keep us at a median tax rate - less than the max. Maybe 33-35%. Helped a little, but with income and growth, RRSP value hardly changed


Okay, why did you convert RRSP to RRIFS to withdraw? I thought you could simply withdraw without conversion before age 71?


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## AltaRed (Jun 8, 2009)

afulldeck said:


> Okay, why did you convert RRSP to RRIFS to withdraw? I thought you could simply withdraw without conversion before age 71?


Many institutions charge for RRSP withdrawals and I think there is an issue regarding what qualifies for the pension income credit and/or pension income splitting....especially if not yet 65 years of age. Pension Income Credit


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## agent99 (Sep 11, 2013)

afulldeck said:


> Okay, why did you convert RRSP to RRIFS to withdraw? I thought you could simply withdraw without conversion before age 71?


Alta answered and is correct. $50 charge to make an RRSP withdrawal, no charge for RRIF withdrawal. And RRSP withdrawal does not qualify as pension income. My wife has no pension, so this allowed her to make the pension deduction (At time, $1000 or $2000, I forget.)


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## pwm (Jan 19, 2012)

Yes, one gets two benefits from converting to a RRIF. 
1). The income qualifies as Pension Income, which an RRSP withdrawal does not, so you get the Pension Income tax credit.
2). The income can be split with a spouse up to 50%, also because it is considered to be Pension Income, which an RRSP is not.
You need to be 65 and it needs to be RRIF income to qualify as Pension Income.
I converted my RRSP to a RRIF when I reached 65 so I could benefit from both of those features of the RRIF. Interesting fact is that in this situation you both get the Pension Income credit of $2,000.


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## afulldeck (Mar 28, 2012)

pwm said:


> Yes, one gets two benefits from converting to a RRIF.
> 1). The income qualifies as Pension Income, which an RRSP withdrawal does not, so you get the Pension Income tax credit.
> 2). The income can be split with a spouse up to 50%, also because it is considered to be Pension Income, which an RRSP is not.
> You need to be 65 and it needs to be RRIF income to qualify as Pension Income.
> I converted my RRSP to a RRIF when I reached 65 so I could benefit from both of those features of the RRIF. Interesting fact is that in this situation you both get the Pension Income credit of $2,000.


Yes. I agree with those to statements. But I thought the Poster I commented on was under 65 and that is why I asked the question. In any case, to get the Pension Income credit both spouses need to be 65-No?


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## Eclectic12 (Oct 20, 2010)

GreatLaker said:


> ... But what about someone that is retired at 60, expecting to have some OAS clawback in the future? If they could carefully plan their taxable withdrawals now to avoid that later, ending up with more money, why not do it?


YMMV ... age 60 from what other posters have complained about could be way too late for dealing with it.




GreatLaker said:


> ... I think the OP's focus on being in the lowest tax bracket is the wrong approach. You want to achieve the highest after tax income when alive, for a given after-tax estate size. Not easy to do, unless you are a spreadsheet expert or have access to financial and tax-planning software like NaviPlan. But the basic fundamentals are not that hard to understand.


I think it's the wrong focus as well.

The fundamentals maybe to easy ... IMO it's the assumptions and confirming the assumptions are on track to apply with enough lead time to deal with it that contribute to the difficulty.




GreatLaker said:


> Say someone is 65 and getting ready to retire. Their marginal tax rate is 40% and they expect that to drop to 30% when they retire. So they make a last RRSP contribution ...
> But now consider that their income is such that all of the RRSP withdrawal will be at an income level subject to OAS clawback at 15%. So instead of 30% MTR when they withdraw, the MTR including OAS clawback is actually 45%. So they paid an extra 5% tax by making that RRSP contribution. Lots of middle income people make that mistake, which could easily be avoided by some tax planning.


For a one time extra RRSP contribution where there's several options, it is relatively easy to plan for.

The optimal RRSP with individual assumptions and different breakdowns of income seems far more complex. With more complexity, there's more chance the planned steps end up with different results or not be available. At some point, trying to plan it may end up being a waste of time.


Cheers


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## Eclectic12 (Oct 20, 2010)

afulldeck said:


> ... But I thought the Poster I commented on was under 65 and that is why I asked the question. In any case, to get the Pension Income credit both spouses need to be 65-No?


Agent99 can confirm ... but it may be sweating the small stuff as it was stated that business income ended at 64 so there may be all of one or two years of pension income credit being forgone. 

Cheers


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## GreatLaker (Mar 23, 2014)

fireseeker said:


> You are describing somebody with $80,000 in retirement income (from pensions, CPP, OAS and investments) _even before touching their RRSP/RRIF_. That is not a middle-income person.
> 
> The median income for Canadian individuals over 65 in 2018 was $29,700. So this person has nearly triple the median income, plus they have registered savings and, presumably, TFSAs.


By "middle income" I was referring to a broad range between low income and high income, rather than any specific definition such as median or average.

Or maybe the OP was concerned about low income earners that want to avoid loss of GIS and other social service benefits that can happen if RRSP withdrawals drive their income above the clawback thresholds. Such individuals can use TFSAs rather than RRSPs since the income will be taxed when earned rather than deferred to when it is withdrawn from a RRSP or RRIF possibly reducing or making them ineligible for programs for low income seniors.


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## james4beach (Nov 15, 2012)

peterk said:


> I think the only way to answer these questions is to do a full blown cashflow and tax analysis at the right moments in your life. Probably around age 50 it's worth knowing the answer to the question "should I keep contributing to my RRSP?"


My own perspective on this is that my RRSP can't be too large; I'm not concerned about putting too much into it.

At age 50, you still have a lot of life ahead of you and many uncertainties. What if I end up declaring bankruptcy at some point in the future? The RRSP is protected from creditors in bankruptcy. They can take your house, they can take your TFSA assets, and non-registered assets, but they can't take your RRSP.

People at all ages declare bankruptcy. This is a unique feature of the RRSP; it can save you from personal ruin. That's a very *asymmetric* benefit,

_pro: _gives you tax sheltered growth and amazing compounding [big]
_pro_: can save you from absolute personal ruin [huge]
_con_: you MIGHT have some annoying extra taxes and clawbacks [minor annoyance]

Additionally, life is uncertain. You might be happily working at age 40-50 and earning high income, but maybe you won't always have such a steady income. There are many reasons you might step away from work. Health reasons, need to help your family, pursuing new education, attempting to start a new business, or your industry completely transforms and dies, leaving you with low income.

One can withdraw from the RRSP in a low income year, without penalty. Money in the RRSP is not "trapped" there until retirement age. I don't know what kind of work the rest of you do, but I'm an engineer who has earned everything between 0K and 200K in a year, and I will very likely have low income years at some point.

If my RRSP ends up becoming very very large, because I've been lucky enough to have consistently high income every year, plus tax sheltered growth the whole time, resulting in some extra taxes at withdrawal... what is there to complain about? That's a great situation.


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## Tostig (Nov 18, 2020)

james4beach said:


> ...
> 
> If my RRSP ends up becoming very very large, because I've been lucky enough to have consistently high income every year, plus tax sheltered growth the whole time, resulting in some extra taxes at withdrawal... what is there to complain about? That's a great situation.


A good problem to have.

It was a during a retirement planning seminar when the Financial Planner mentioned staying within the lowest tax bracket and the full taxation on the balance of the RRIF upon death of the last spouse. That kind of thing messes with your brain.

I ran several spreadsheets and have determined that, unless you're a real hotshot investor (like one of those with over a $1 million in his TFSA already) your annual required RRIF withdrawal will never exceed your top annual income of your top income earning years.


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## milhouse (Nov 16, 2016)

While also situation dependent, what's the consideration around annuitizing some or all of your RRSP/RRIF?
It addresses OP issue 1 of remaining funds being taxed at full marginal rate when surviving spouse dies. You use your money now with mortality credits without fear of running out.
It addresses OP issue 2 of a larger income than comfortable, in that you can likely plan around a consistent income stream vs forced rising withdrawal rates.

Might be an option for those without a (DB?) pension and enough of a non-registered or TFSA to leave as a legacy instead if wanted.

Or are annuities just off the table as an option for now in today's low interest rate environment?
Fred Vettese advocates a lot for annuities in his books but I think I've read some recent quotes from him that they might not be ideal with the current low rates.


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## Gator13 (Jan 5, 2020)

Don't worry about having too much money in your RRSP. It can help you weather some tough years or help cover unforseen expenses. You can defer withdrawals until 72.

I don't mind that I'll have to pay tax when I withdraw the funds. Hopefully the tax percentage I pay will be a little less than today. And maybe my OAS will also be fully clawed back. That's okay to. That's means I am doing just fine. Best to have a glass half full outlook.


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## Tostig (Nov 18, 2020)

Over the years I have heard of several strategies in which you can reduce or eliminate the taxes on your RRSP.

One is the RRSP meltdown in which you borrow money to invest. The interest on your loan can be written off in your tax return. The tax credit balances the tax you are charged for withdrawing from your RRSP.

The second is this video.






I wonder if anybody has any experience with any of these methods. I'll tell you now, I'm not interested. The first method seems risky if your invested loan goes sour. And the second method just may catch the attention of CRA even though the video says it's all legal.


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## Eclectic12 (Oct 20, 2010)

No experience ... but I'd have to run numbers as the low interest rates make the melt down through borrowing more difficult when the taxes kick in.

The bottom tax rate is 20% where an expensive loan would be 6%. To come close to balancing the tax bill, one would need to borrow at least 3x the amount being withdrawn. The following year, unless one avoids income paying investments, there will be taxable income plus the RRSP withdrawal income giving a bigger tax bill. At some point, the borrowing may become too large, the gov't pensions will start and the RRSP will have to be collapsed - giving a limited window of opportunity.

Then too, if one sells to preserve capital for an investment going sour - does one reduce or skip the RRSP withdrawal that year? Or does one let it sink into a loss position to avoid taxes?


I'll check out the video but the main way I can think of that the RRSP to TFSA would work close to or tax free would be in periods of low income where one has not used TFSA contribution room yet or has withdrawn and spent TFSA gains in previous years.


Cheers


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## hboy54 (Sep 16, 2016)

I look every year for opportunities to get money out of my RRSP on a low tax basis. For example, 2020 provided considerable capital losses and reductions in dividends. Plus I have about $8,000 of AMT paid in past years that will expire away. So I sold some shares in my RRSP at a loss, and purchased them again in the margin account. Extracted about $42,000 from the RRSP which will be taxed about $3000 plus AMT amount recovered. As a happy accident, said shares are now up 40% and now taxable as capital gain instead of income. I should probably harvest a capital gain somewhere before the next budget so this last bit of math isn't invalidated.


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## Tostig (Nov 18, 2020)

hboy54 said:


> I look every year for opportunities to get money out of my RRSP on a low tax basis. For example, 2020 provided considerable capital losses and reductions in dividends. Plus I have about $8,000 of AMT paid in past years that will expire away. So I sold some shares in my RRSP at a loss, and purchased them again in the margin account. Extracted about $42,000 from the RRSP which will be taxed about $3000 plus AMT amount recovered. As a happy accident, said shares are now up 40% and now taxable as capital gain instead of income. I should probably harvest a capital gain somewhere before the next budget so this last bit of math isn't invalidated.


Sounds like you'll double-taxed on the same thing. First, you'll be taxed on the RRSP withdrawal. And then whenever you decide to sell, you'll be taxed on the capital gains.

I thought it'd be better to transfer out in-kind, be taxed on the RRSP withdrawal, sell at a loss and have your capital loss cancel part of your RRSP withdrawal tax. That is if you're lucky enough to have a crystal ball and time these things.


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