Q. I retired seven years ago, when I was 55. I’d like to run projections and analyze the best way to draw down my RRSPs with the least amount of taxes payable. Is there a software package you’d recommend that can do this?
Here are some other details about my financial circumstances. I have no corporate pension; all my retirement money is invested in RRSPs/TFSAs and I pull income out as needed. My wife has a good pension, so we have a good blend of guaranteed and market-based plans. I want my money to last until I reach age 100 (however, I don’t think I’ll need to use it all and want to grow the funds for my estate), and prefer not to leave much in my registered investments for the taxman. I also want to receive Old Age Security (OAS) and keep as much of it as I can by avoiding clawbacks.
Any suggestions for software—as well as tips on how I can meet my goals—would be helpful.
A. I love this question, Peter! So much so that I have to answer it in three parts so I can properly address your software query, your RRSP withdrawal question, and the issue of your estate.
Financial planning software
Peter, I am not aware of any free consumer financial planning software that will do the job you’re looking for. Experienced financial planners can help you run the numbers, but if you’re determined to go it alone you could consider purchasing professional financial planning software, which costs about $1,000 annually (although you might be able to take advantage of the free trial offers). If you google “financial planning software Canada” you will see some options.
Another possibility is to build your own Excel spreadsheet, or use a free calculator off the Internet. If you go this route, consider these key points:
- Are you able to model everything? All current and future expenses, such as home(s), vehicles, vacations, career changes, cash flow, etc., must be included in the model.
- If you don’t model everything, you might guess at a retirement income need of say, $100,000 after-tax annually for the rest of your life. This approach may:
- Overestimate or underestimate the amount you need to save for retirement.
- Make it easy to adjust your numbers up or down without any real meaning. For instance, if you find you haven’t saved enough to support a $100,000 annual net income in retirement, you might drop your spending projections in the software to $90,000 to make up the difference. But what will you sacrifice by dropping your spending? Is it something you are willing to give up? Only you can answer that question.
- Are the tax calculations correct? If the program uses average tax rates and/or does not complete a tax calculation each year, you won’t get an accurate solution.
- For non-registered investments, returns should show how much of the return is interest, dividend, or capital gains income, and the adjusted cost base recorded. Using a simple 5% return will give you inaccurate results since you are looking for after-tax comparisons.
- Finally, do you have the knowledge and experience to recognize when the software is giving you an inaccurate result? When a simple calculator tells us that 2 + 2 = 5, we know there is an error. Financial planning software is a powerful tool, but it is also a dangerous tool in the hands of the inexperienced.
If you decide to work with an experienced planner (which I recommend), you will have to consider the ways in which planners work and which style is best for you. Generally, they follow either a consultative or collaborative model. The main difference is that a consultative planner will develop the plan for you and a collaborative planner will develop the plan with you.
In my opinion, I think you’ll learn more with the collaborative approach. And since more learning helps you become more comfortable with your finances, that is ultimately the path to your own financial freedom.
RRSP withdrawal strategy
Let me rephrase your question, Peter. You’d like to know the best way to draw down your RRSP* while paying the least amount in tax and maximizing your estate.
Finding an answer to your question includes a lot of moving parts, such as when to start receiving CPP and OAS, when to convert your RRSPs* to RRIFs, and if you should reinvest RRIF withdrawals in a TFSA*. I have run 16 different solutions which you can see here.
There was a slight advantage to starting your CPP and OAS at age 65, drawing on your non-registered money now, delaying your RRSP/RRIF withdrawals to age 72, and maximizing your TFSA contributions. However, advantages created in one area cancel out advantages created in other areas, which means it doesn’t really make much difference how you draw down your RRSP*.
The beauty of this result is that each January you can plan your income strategy for the year and be as tax efficient as you can each year. This gives you a lot more flexibility than committing to a long-term plan.
Below are explanations of the various pros and cons to each option.
CPP & OAS
You can start receiving CPP anytime between ages 60 and 70. Delaying it beyond age 65 increases your pension by 0.7%/month, 8.4%/year, or 42% over five years. Starting CPP before age 65 means reducing it by 0.6%/month, 7.2%/year, or by 36% if you take your CPP at age 60.
Similarly, you can start collecting OAS anytime between ages 65 and 70. Every month you delay past age 65 the pension increases by 0.6%/month, 7.2%/year, and 36% if you delay to age 70. Delaying your OAS also increases the OAS clawback threshold, meaning you can earn more taxable income before all of your OAS is clawed back.
Remember, the OAS pension ($7,362/yr.) is clawed back by $0.15 for every dollar over $77,580 (in 2019). If you take the pension at age 65 all of your OAS is clawed back when your taxable income reaches $126,058.
Delay your OAS pension to age 70 ($10,012/yr.) and all of your OAS pension will be clawed back when your taxable income reaches $144,326. Here is the math:
- $144,326 (max. income) – $77,580 (min. income) = $66,746
- $66,746/15% (OAS reduction, $0.15%) = $10,012 (amount clawed back)
By delaying CPP and/or OAS, you will:
- Receive larger guaranteed CPP/OAS pension income for life, and in the case of OAS, more clawback room (pro)
- Increase your taxable income, which may raise your marginal tax rate on RRIF withdrawals and non-registered investment distributions (con)
By taking CPP and/or OAS early, you will:
- Receive a lower guaranteed CPP/OAS pension income for life (con)
- Have lower annual taxable income, which may reduce your marginal tax rate on other taxable pension income (pro)
There are a few things to consider with your RRSP/RRIF. Here are the key points:
- If you don’t have another pension, you can draw $2,000/yr. from a RRIF at age 65 and claim the $2,000 pension income tax credit.
- You can base the minimum RRIF withdrawal on your partner’s age if he or she is younger than you. This results in a smaller, taxable, withdrawal with the option open to draw more.
- The tax-sheltered investment growth inside your RRSP*/RRIF is very powerful and is often ignored by investors. Even if you have to pay a lot of tax on the collapse of a RRIF, it’s likely you will still end up with more money than if you tried to accumulate those savings in a non-registered account.
- You control the amount of RRIF income you receive beyond the minimum withdrawal requirement.
- Any money withdrawn from a RRIF is eligible for pension splitting with your partner.
Drawing on a RRIF has similar implications to CPP and OAS income:
- Draw early and you have a lower taxable income (pro), but you lose the tax-free compounding (con) and potentially a larger income (con) than if you delay to age 72.
These are the benefits of the TFSA*:
- The same tax-sheltered investment growth as an RRSP.
- Withdrawals are tax free, so they are not reported as income on your tax return.
- If you are not going to spend all of your money in your lifetime, the tax-free nature of TFSA withdrawals makes it a great place to leave money to children.
- The maximum contribution to a TFSA is $63,500 (2019) or $6,000/yr.
Things to consider when contributing to your TFSA with money from your RRIF:
- 100% of your RRIF withdrawals are taxable (con), and because of the tax there is less money to invest in the TFSA (con), which means you have less tax-sheltered money compounding.
- Once in the TFSA, the money will compound tax-free (pro), and all withdrawals are tax-free (pro).
Things to consider when drawing from your non-registered investments to contribute to a TFSA:
- Depending on the nature of your investment, only some of the withdrawal will be taxable (con, but an advantage over the RRIF).
- Over time you are reducing the amount of taxable distributions, which reduces your annual taxable income (pro).
I hope by now, Peter, you can see what I mean when I say that creating an advantage in one area often offsets an advantage in another area.
In your case, I think a better use of financial planning software would be to help you figure out how to spend your money, as I expect those decisions will have a bigger impact on your finances than which RRSP withdrawal strategy to follow.
If you’re not going to spend all your money during your lifetime, what is your focus? Accumulating as much wealth as you can or helping your children? I’m guessing that, as much as you want to accumulate wealth, helping your children is more important. If that is the case, think about ways to use your money so other family members can take advantage of government programs that you can’t. Here are a few simple examples:
- Make the RESP contributions for grandchildren so you maximize the government grants.
- Contribute to TFSAs for your children. (You can always have an informal arrangement with them stating that it you ever need the money back, it is yours.) There are no tax implications.
- Make RRSP contributions for them. This may reduce their taxable income so that they receive more of the Child Tax Benefit.
- Pay for family vacations that bring everyone together and create lasting memories.
Of course, there are many other things you can do to help your children, such as making mortgage payments. But it’s best to find a balance where they still have an opportunity learn how to manage money themselves, so when the time comes they don’t blow everything you worked so hard over your lifetime to accumulate.
I could also write about life insurance as part of your estate plan, but I will leave that topic to a future column.
Thanks, Peter, and I apologize for the length of my response. Best of luck in achieving the retirement you desire.
This commentary is provided as a general source of information and is intended for Canadian residents only. Allan offers financial planning and insurance services through Atlantis Financial Inc.
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