Market and Investment Insights

You focus on accumulating assets your whole life, then what? 

Let’s begin by stipulating that what your uncle John thinks was a good idea would not make the list. We’re going to be a little bit more calculated in how we walk you through this. For the record, it’s not an exhaustive list of all possible situations because you’re talking about triggering taxable income — there are a lot of moving parts, and some situations are quite complicated.

A common question that we get from clients leading up to retirement is how do you use an RRSP and when do you withdraw funds from it?

Here is a typical scenario:

You have an RRSP that is converted to an RRIF.

RRSPs and retirement income funds can basically be the same account, and they can hold the same investments. There isn’t a requirement to make a change like that to change the investment strategy, although sometimes it’s called for — that’s the time to revisit the investment strategy, but there are no requirements. So it’s not a taxable event — it’s not an event that causes any other disruption other than it changes the account type.

When moved into an RRIF, there becomes a minimum amount you have to withdraw each year and take the taxable income. You could leave the money invested, put it into your TFSA or put it in a regular investment account, but in a RRIF, there’s a minimum amount that’s going to come out every year for taxes. You can RRIF your money pretty much anytime you want, but if you haven’t moved your money into a RRIF by the calendar year that you turn 71 (under current rules), you must move it to a RRIF that year. There’s a calculation that’s done based on the market value at the end of that year and the following year, the calendar year you turn 72, there’s a minimum withdrawal amount that’s a little better than 6%. It’s going to have to come out to your RRIF. Now again, you can choose to do it earlier, or you can wait until you get forced into it in your 70s.

Keep in mind that that date and numbers can change with every federal budget.  As an advisor, it’s our job to keep an eye on it for our clients so that when the base rules change, then that causes a change to your plan. But you can choose to take the money out sooner than that. Some people take the money out because they need the money to live on in retirement when they retire at 60 or 65, but basically, that’s the RRSP to RRIF conversation scenario.

Another discussion is whether or not to defer their RRIF withdrawals or the RRSP withdrawals until they have to at age 71 which is not necessarily the best case. If cash flow is an issue, that’s one place to draw from, but then there’s the whole tax discussion as well. And then does it make sense to pull funds from an RRSP or a RRIF early? In a lot of situations, it may. We can’t really say defer your RRSP withdrawals to age 71 and take from your other assets or say, no, take from the RRSP or RRIF assets first and pull from the other places at a later date. That’s part of a larger assessment, and knowing your kind of complete tax picture now and trying to get an idea in terms of how that may look going forward as well.

Some people believe they absolutely have to have all my money out of my RRSP before 71 because they don’t want to RRIF. The odd case that we’ve seen is reasonable, but very few because what you’re looking for is to get your taxable income or your taxable tax paid to be the least amount over the next 10 or 20 years. And you do that by trying to use up the lower tax bracket as you go.

So, you want to avoid two things:

You want to avoid super low-income years, and you also want to avoid super high-income years. You want to try to apply in the sweet spot if you can. And that’s part of what planning does.

It starts with what are your cash flow needs at this point. And then  taking into account all your sources of income, whether it be your Canada Pension Plan (CPP) or your Old Age Security (OAS) or your pension income or the portfolios. And then assessing from there, how do you best pull from your sources of income to meet that cash flow need? One thing to consider as well, if you don’t have a pension with RRIF withdrawals, you can be eligible for a pension credit at age 65. Early on, there may be ways to pull income in a very low tax-efficient manner from your RRSPs or RRIFs.

There are other wrinkles that creep into the conversation, too, because once you start drawing your OAS, if your income goes beyond the threshold, somewhere in the mid $70,000 range, and again, we’re not going to give a specific number because it changes, you could be subject to an OAS clawback, which basically means you’re going to start pulling back the benefit that you have received. The OAS is designed as an income supplement. Beyond a certain threshold, you pay that back. So one of the thresholds that we take a look at is that we want to avoid, in most cases, people ending up in old age security clawback — that’s one of the many things that we look at from a tax planning perspective.

There are many different scenarios and the best place to start is consulting someone that you trust — like we mentioned, your uncle John is not a really good source for information because, even if he was tremendously successful, he was successful at a point in time in his circumstances. This is a different point in time. You have your circumstances, and your math may or may not be the same.