Q: I’m a 70-year-old widower, and want to know about early withdrawal from an RRSP for my particular situation. My pension income is $60,000+ per year. I have $250,000 in a RRIF and $550,000 in an RRSP. In addition I have $70,000+ in my TFSA and $180,000 in an investment account. I find I have more money at the end of each year than I had at the beginning of the year. In other words, I can live quite comfortably on my income but I am concerned that I should be drawing some income from my RRSP now rather than waiting until I have to convert the RRSP into a RRIF and be taxed at a higher rate and get clawed back on my OAS. Can you suggest a few “what if” scenarios and give me some guidance on whether or not I should consider withdrawing some income from my RRSP now.
A: Contributing money to our RRSPs has become synonymous with saving for retirement. We defer tax payments while employed in anticipation of paying less tax during retirement. Many of us have come to enjoy the tax refund that goes along with RRSP contributions.
It might then surprise you that there is a case for simply saving too much in an RRSP account. The strategy works as long as the marginal tax rate you would have paid had you not contributed is higher than the marginal tax rate you are expecting or projecting to pay in those retirement years.
You know you have potentially too much annual taxable income in retirement when:
- Your taxable income reaches beyond the OAS clawback threshold of $73,756 (2017) or
- Your marginal tax rate is in the upper tax brackets effective in your province
If you act early enough, there are some methods to reduce annual taxable income originating from an RRSP
- Spread RRSP/RRIF withdrawals over more years (a lower amount per year)
- Withdraw some RRSP funds before CPP & OAS entitlements start
- Split pension income with your lower taxable income spouse
Even the best laid plans may not fit with your reality. According to Stats Canada, 8.32% of females will die between age 60 & 70 and 13.4% of males. A couple that has saved up to their 7th decade has a 1 in 9 chance of being widowed. The widower finds him/herself with the accumulated couple’s lifetime savings without having had much time to spend it.
Larry finds himself at age 70 with a sizeable RRSP & RRIF accumulation of $800,000. He has a lifetime pension, CPP & OAS entitlements along with savings in TFSA and Non-Registered accounts. Larry is free to spend up to $90,000 annually adjusted for inflation and would never run out. Larry isn’t really concerned about the withdrawal from savings but, more so, the associated income tax and OAS clawback.
An even withdrawal schedule from his RRSP/RRIF would cause a full clawback of OAS plus push Larry’s taxable income into a higher tax bracket. He can’t reduce the amount much due to the minimum requirement so he’s running low on options.
After a number of income projection iterations I find that Larry is correct in suggesting that early withdrawal of his RRIF would lower the taxes on his RRIF withdrawals over the long term. By paying higher tax early, he can again become eligible for his OAS income afterwards.
The optimal RRIF withdrawal schedule for Larry is approximately $130,000 annually (Ontario resident) for the next 5 years followed by $12,000 annually thereafter. Other slight variations would apply to other provinces of residence. These tax payable projections include the eventual payment of taxes on Larry’s estate.
The result of the early RRIF withdrawals is more savings shifted to Non-Registered accounts. This presents Larry with some options to gift to family members. Regular charitable donations would also lower tax payable by about one dollar for each two dollars donated.
Tom Feigs is a certified financial planner and retirement expert based in Calgary
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