# RRSP: Reduce it before hitting 71



## Joewho (Nov 18, 2015)

Hello,
You guys were so good with my previous question I thought I would try another question that my friend asked. he has about a million dollars in an RRSP. He is married, if that matters. he is about 67. He has been advised that he should take money out of his RRSP before hitting 71, which is the age at which one is required to take out about 5 per cent, I think. I have read that if you leave that money in the RRSP you might be just as well off, as it will be growing without tax, at least for a number of years. I don't know if there is any pertinent information that I have left out? I imagine it is pertinent that he does not need this money and will not spend it but rather invest it outside the RRSP.
thanks Joe


----------



## yyz (Aug 11, 2013)

If he can withdraw a part of it in a tax advantageous way then I would say yes go for it. Really depends on his income level


----------



## LBCfan (Jan 13, 2011)

I started withdrawal at 66 since I could split the income with my low income wife. Saves a fair bit of tax.


----------



## steve41 (Apr 18, 2009)

As I have repeated many times..... it is an actuarial issue. You might start melting your RRSP early only to find your estate would have been better off if you had continued to shelter it. Or vice versa.


----------



## Davis (Nov 11, 2014)

What Steve said. There is no right answer for all people, and there are too many factors at play for people here to give you the right answer. A fee-only financial planner would be able to help if you friend doesn't already have a planner.


----------



## AMABILE (Apr 3, 2009)

i started a rrif at 65 (i'm now 67)
once a year i transfer only $2000 from my 
rrsp to the rrif for withdrawal for the pension credit
i will continue this until i'm 71


----------



## GreatLaker (Mar 23, 2014)

It really depends on what other assets he has, and the total income from RRSP/RIF accounts and pensions. This article discusses the concept:
http://www.moneysense.ca/retire/how-to-tap-your-rrsp/



> I imagine it is pertinent that he does not need this money and will not spend it but rather invest it outside the RRSP.


Then it is possible income in retirement will be high enough that early withdrawals from the RRSP would make sense. There is not enough information in your post to know, and a review by a professional financial planner is advisable.


----------



## jargey3000 (Jan 25, 2011)

this is an interesting topic. What basic information or factors would you need to look at in order to try to determine if it made financial or tax-related sense or not for someone?


----------



## Userkare (Nov 17, 2014)

I retired almost 2 years ago at 64. I will not collect CPP/OAS until I hit 69. I'm drawing down my RRSPs just enough to keep me at the upper limit of the lowest tax bracket, whether I need it or not. The $10K TFSA would have been a great benefit for that, but you-know-who says he'll fu**k that up for me. 

Once I start collecting CPP/OAS, and I am forced to withdraw a minimum from RRIF, I want to still be in that lowest tax bracket. I used a spreadsheet to project that plan over the next 30 years, if I live that long, and took it to a fee-for-service adviser. He blessed it.

As others have said, you have to understand your own situation before deciding when to access your RRSP.


----------



## Userkare (Nov 17, 2014)

AMABILE said:


> i started a rrif at 65 (i'm now 67)
> once a year i transfer only $2000 from my
> rrsp to the rrif for withdrawal for the pension credit
> i will continue this until i'm 71


Hi, can you explain this please. 

If you transfer funds from RRSP to RRIF, then immediately withdraw it, there's a tax advantage over drawing it directly from an RRSP?


----------



## heyjude (May 16, 2009)

Userkare said:


> Hi, can you explain this please.
> 
> If you transfer funds from RRSP to RRIF, then immediately withdraw it, there's a tax advantage over drawing it directly from an RRSP?


My understanding is that RRIF income is eligible for the pension tax credit, but that lump sums drawn from an RRSP are not. See the link below:

http://retirehappy.ca/are-you-taking-advantage-of-the-pension/


----------



## agent99 (Sep 11, 2013)

jargey3000 said:


> this is an interesting topic. What basic information or factors would you need to look at in order to try to determine if it made financial or tax-related sense or not for someone?


You would need to make a lot of assumptions about future returns and future tax changes and rates and then enter those into a program that calculates the odds of your assumptions working out or not. It is all one big guess trying to foresee the future, but some experts will try and do it for you, at a cost.

A rough guide might be that it would be beneficial if taxpayer (or couple) has no pension other than government pensions. And if he/she is in a low tax bracket when all other income is included. On top of that, they would, like the person in original post, have a substantial RRSP that when conversion to RRIF occurs would put them in one of the highest tax brackets. In that case, it might be worthwhile to withdraw each year from retirement to 71 an amount that would put them in a mid tax bracket. It might also be useful in that at that age, you might like to have the extra money to spend rather than wait until you are too old!

We were in a situation like that and did withdraw from our RRSPs. But only about $10k per year which hardly made a dent in the total RRIF value at 71. But it was nice to have the money early. It's not all about saving to provide an inheritance to your kids! BTW, if you have no other pension income, you get an extra credit when filing your tax return if you convert part of your RRSP to RRIF early, and draw from that.


----------



## GreatLaker (Mar 23, 2014)

heyjude said:


> My understanding is that RRIF income is eligible for the pension tax credit, but that lump sums drawn from an RRSP are not.


+1

Also withdrawals from RRSP are subject to withholding tax, whereas income taxes on RRIF withdrawls up to the mandatory minimum are not due until your tax return is filed.


----------



## Retired Peasant (Apr 22, 2013)

heyjude said:


> My understanding is that RRIF income is eligible for the pension tax credit, but that lump sums drawn from an RRSP are not.





GreatLaker said:


> +1
> Also withdrawals from RRSP are subject to withholding tax, whereas income taxes on RRIF withdrawls up to the mandatory minimum are not due until your tax return is filed.


+2 Also some financial institutions charge an admin fee to withdraw from RRSP, but not from RRIF


----------



## Userkare (Nov 17, 2014)

Retired Peasant said:


> +2 Also some financial institutions charge an admin fee to withdraw from RRSP, but not from RRIF


I believe that's only for a transfer, not a withdrawal - but if my RRSP is with one institution and the RRIF with another, I would surely get hit with that admin fee every time I transferred funds.



GreatLaker said:


> +1
> 
> Also withdrawals from RRSP are subject to withholding tax, whereas income taxes on RRIF withdrawls up to the mandatory minimum are not due until your tax return is filed.


10% withheld on l.t. $5000. In any case, with CPP/OAS I'll be above the no-tax bracket. I don't think I can avoid paying the fed 15% + On 5.05%; I just don't want to be in a higher bracket if I can avoid it. If they withhold the 10%, I could probably owe no additional tax when I file.


Also... This makes me believe that RRSPs can qualify for the pension income deduction if they are annuity payments (???) and I'm over 65....
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/314/lgbl-eng.html


----------



## heyjude (May 16, 2009)

Userkare said:


> I believe that's only for a transfer, not a withdrawal - but if my RRSP is with one institution and the RRIF with another, I would surely get hit with that admin fee every time I transferred funds.
> 
> 
> 
> ...


Yes, if your RRSP is an annuity and you are over 65, it should qualify for the pension income credit. However, if you want to buy an annuity, it may be preferable to buy it with after tax funds, because the annuity payments are partly return of capital and will be taxed as such. If you have an annuity in your RRSP, the payments will be taxed as income. So the pension income credit may just compensate for that extra tax. 

My financial institution does charge a fee to make a withdrawal from an RRSP, even if the funds remain at the same institution. There are no fees to set up and administer an RRIF.

PS. I am in my late 50s, retired, and am withdrawing from my LIRA (which I have converted to a PRIF and a LRIF). I expect to deplete those completely before age 71. I have also withdrawn from some of my RRSPs and will set up an RRIF after the LIRA funds have been exhausted. I am striving to stay in a lower tax bracket between now and age 71, but hope to avoid large RMDs and a massive tax hit in my 70s.


----------



## AMABILE (Apr 3, 2009)

i'm with bmo investorline
no withdrawal fees whatsoever


----------



## Jaberwock (Aug 22, 2012)

Income from a RRIF can be split with your spouse, whereas direct withdrawals from an RRSP cannot. That is big advantage for some people, myself included.

Minimum withdrawals from a RRIF apply at all ages, even if you have not turned 71. You can find the information here
If your spouse is younger than you, then her age can be used instead of your to establish the yearly minimum.

I am taking more than the minimum from my RRIF, using the extra to top up our TFSA's and trying to adjust my income to stay inside the second tax bracket and below the OAS clawback for as long as I can. That is what works best for me, but not necessarily for everyone.


----------



## Retired Peasant (Apr 22, 2013)

Userkare said:


> I believe that's only for a transfer, not a withdrawal - but if my RRSP is with one institution and the RRIF with another, I would surely get hit with that admin fee every time I transferred funds.


Nope. TDDI charges to withdraw from a RRSP. They do not charge to withdraw from a RRIF. It's the only reason I opened a RRIF with them; so that I could withdraw from my RRSP without charge. It's silly really. I transfer from my RRSP to my RRIF, and then withdraw from the RRIF; they don't get the admin fee, but it's actually more work for them.


----------



## Eclectic12 (Oct 20, 2010)

heyjude said:


> My understanding is that RRIF income is eligible for the pension tax credit, but that lump sums drawn from an RRSP are not.


The potential other advantage, AFAICT is that RRIF income seems to avoid the "partial or full withdrawal" fee (typically around $100 to $150 or so). On smaller amounts, I'd expect this to be beneficial.

Then too, as I understand it - this also avoids or reduces the withholding tax (avoids for amounts withdrawn at or below the minimum withdrawal amount).


Cheers


----------



## Joewho (Nov 18, 2015)

Thanks very much for the replies, eceryone. I see that it is very much dependent on one's own particular situation. Pretty hard to figure it out. I was just wonderi g whether there might be a rough rule of thumb that in many cases, leaving it in the rrsp would be a wash when the time was added for tax free growth. Hard to tell, though, i can see. But, once again thanks for the discussion of the subject. Even discussing it helps.
Joe


----------



## Eclectic12 (Oct 20, 2010)

Lots of good info but I believe a key point has been missed.



Joewho said:


> ... He has been advised that he should take money out of his RRSP before hitting 71 ...
> I have read that *if you leave that money in the RRSP* you might be just as well off, as it will be growing without tax, at least for a number of years ...


As I understand it, the RRSP has to be terminated by Dec 31st of the year one turns 71. So "leaving" money in the RRSP is not choice that is available.

The choices seem to be:
a) Withdraw from the RRSP the lump sum (likely not a good choice for a sizeable RRSP, this means reporting a sizeable income in a single tax year).
b) Use the proceeds to purchase an annuity.
c) Transfer the funds to a RRIF (Registered Retirement Income Fund).

http://www.epr.ca/what-to-do-with-your-rrsp-investment-when-you-turn-71-or-you-retire/


Note that as some posters have indicated, one does not have to wait until age 71 to setup a RRIF plus one does not have to transfer all of the RRSP to the RRIF until age 71, Dec 31st.


My apologies if this was already known.


Cheers


----------



## OnlyMyOpinion (Sep 1, 2013)

My interpretation of the OP was:
_He has been advised that he should take money out of his RRSP before hitting 71._ - I assumed they are referring to taking out as much as possible (i.e. a 'meltdown'), not just taking advantage of the pension credit. 

_I have read that if you leave that money in the RRSP you might be just as well off, as it will be growing without tax, at least for a number of years_ - I assumed they mean leaving it in to grow until you reach the age of 71. Of course if you 'convert' to a RRIF then, your investments will continue to provide returns and grow, you just have to withdraw the prescribed minimum each year (which is likely to exceed the growth in the account).


----------



## Joewho (Nov 18, 2015)

Hello, 
Perhaps i was not very clear. The idea is to transfer a certain amount of money to a rrif before reaching the mandatory rrif age of 71. Calculations indicate that the early rriffs would result in a tax rate of 39 per cent, rather than the 50 per cent that would be required, say at death for the Estate. If $50,000 was taken out, say at that tax rate, rather than the 50percent rate, there would be a saving of $10,000 or $11,000 for the year. Not bad. But, if this were to grow tax free, what would it give. I have to say that i can't figure it out. But, there is also the point made in the article someone kindly linked to, that if one of the spouse's dies, there is a big difference. That is a pretty big point in favour of starting to empty the rrsp, even if it was otherwise a wash. Thanks once again for your good counsel.
Joe
Joe


----------



## Eclectic12 (Oct 20, 2010)

I wasn't sure if the "leave it there" was up until age 71 or if there was a mistaken idea that the RRSP could continue past Dec 31st of the year one turned 71.


As for the "start the RRIF early" - some here on CMF have posted they did this so perhaps they can comment on the way they figured it out.


As for "what would it give if this were to grow tax free" ... what are the assumptions about date of death and how long income will be low enough for the RRIF to allow a tax advantaged withdrawal rate.


As for "if one's spouse dies" ... there's lots of variables. Since the RRSP/RRIF can transfer to the spouse tax free (and women tend to live longer), depending on income etc., it might not be such an disadvantage.



Cheers


----------



## heyjude (May 16, 2009)

Eclectic12 said:


> As for the "start the RRIF early" - some here on CMF have posted they did this so perhaps they can comment on the way they figured it out.


taxtips.ca is an excellent source of information on maximum and minimum RRIF withdrawal rates, and includes several calculators.

http://www.taxtips.ca/calculator/rrsprrifwithdrawals.htm


----------



## 0xCC (Jan 5, 2012)

Joewho said:


> Hello,
> Perhaps i was not very clear. The idea is to transfer a certain amount of money to a rrif before reaching the mandatory rrif age of 71. *Calculations indicate that the early rriffs would result in a tax rate of 39 per cent, rather than the 50 per cent that would be required, say at death for the Estate. * *If $50,000 was taken out, say at that tax rate, rather than the 50percent rate, there would be a saving of $10,000 or $11,000 for the year. Not bad. But, if this were to grow tax free, what would it give.* I have to say that i can't figure it out. But, there is also the point made in the article someone kindly linked to, that if one of the spouse's dies, there is a big difference. That is a pretty big point in favour of starting to empty the rrsp, even if it was otherwise a wash. Thanks once again for your good counsel.
> Joe
> Joe


Careful with your math there. I think that the 11% difference in tax rate would result in a $5,500 savings in tax on a $50,000 withdrawal, not a $10,000-$11,000 savings. As to whether it is better to leave the funds inside an RRSP/RRIF or make the withdrawal you need to figure out how much you would be left with after-tax in both cases. If you can withdraw now at 39% tax vs. later at 50% tax rate and you don't need the money and the money will be invested in the same thing both inside and outside the registered account then you will have 61% of what you could invest outside the registered account vs. inside the registered account.

I haven't had enough coffee yet this morning to completely figure out the rest of the analysis but you have to consider that in the non-registered case the investment will start off already having the tax paid on it so any taxes owing would be on either income or capital gains vs. the investment held inside the registered account which still has all the tax owing on it.


----------



## lonewolf (Jun 12, 2012)

Joewho said:


> Hello,
> You guys were so good with my previous question I thought I would try another question that my friend asked. he has about a million dollars in an RRSP. He is married, if that matters. he is about 67. He has been advised that he should take money out of his RRSP before hitting 71, which is the age at which one is required to take out about 5 per cent, I think. I have read that if you leave that money in the RRSP you might be just as well off, as it will be growing without tax, at least for a number of years. I don't know if there is any pertinent information that I have left out? I imagine it is pertinent that he does not need this money and will not spend it but rather invest it outside the RRSP.
> thanks Joe



Take out enough to top up TFSA is a given. If planning to break financial ties with Canada & live out side of Canada leave money in RRSP till 71 then take money out & get taxed @ 25%


----------



## Joewho (Nov 18, 2015)

0xCC said:


> Careful with your math there. I think that the 11% difference in tax rate would result in a $5,500 savings in tax on a $50,000 withdrawal, not a $10,000-$11,000 savings. As to whether it is better to leave the funds inside an RRSP/RRIF or make the withdrawal you need to figure out how much you would be left with after-tax in both cases. If you can withdraw now at 39% tax vs. later at 50% tax rate and you don't need the money and the money will be invested in the same thing both inside and outside the registered account then you will have 61% of what you could invest outside the registered account vs. inside the registered account.
> 
> I haven't had enough coffee yet this morning to completely figure out the rest of the analysis but you have to consider that in the non-registered case the investment will start off already having the tax paid on it so any taxes owing would be on either income or capital gains vs. the investment held inside the registered account which still has all the tax owing on it.


Right you are, of course. Regarding the question about coffee. I don't know whether there is enough coffee around that would help me figure out this question. In any case, the person in question has made an appointment with the bank to open up a rriff today. The deciding point was the question of the possible death of one of the spouses.
thanks joe


----------



## OnlyMyOpinion (Sep 1, 2013)

Well you lost me... normally you would ensure that your spouse is listed as the beneficiary of your RRSP and RRIF, so that if you die it passes to them outside of the will/estate and without any taxes payable.


----------



## Eclectic12 (Oct 20, 2010)

This was my initial thought as well ... but then again, where one is concerned that there's too much in one's own RRSP, having the death of a spouse merge the two RRSPs likely will add to the challenge.


Assuming ... of course, that the RRSPs are somewhat comparable as opposed to one large and one small. Other factors such as pension and CPP will also play into this.


Cheers


----------



## Joewho (Nov 18, 2015)

OnlyMyOpinion said:


> Well you lost me... normally you would ensure that your spouse is listed as the beneficiary of your RRSP and RRIF, so that if you die it passes to them outside of the will/estate and without any taxes payable.


yes, but the one spouse left has a much higher income and loses tax splitting


----------

