Q: I am a widower, 80 years old, and I am being taxed about 30% on RRSP withdrawals. Can you suggest a better plan? I also have some TFSAs.
A: Just to clarify for the other readers, Bob, your Registered Retirement Savings Plan (RRSP) withdrawals are no doubt coming out of a Registered Retirement Income Fund (RRIF) given your age. You can’t have an RRSP after the age of 71, and the majority of RRSP holders convert their RRSPs to a RRIF by that point.
RRIFs have minimum withdrawals that you need to take each year based on your age and a government mandated percentage of your account value as of the previous year-end. If you’re just taking the minimum withdrawal, there’s no tax withheld. That doesn’t mean there’s no tax payable, as tax payable depends on your other sources of income, your tax deductions and your tax credits for the year when you file your tax return.
You reference a very specific tax rate on your RRIF withdrawal of 30%, Bob. I suspect you may be talking about a lump-sum withdrawal from your RRIF, which would indeed be subject to a pre-determined withholding tax depending on the amount of the withdrawal.
A withdrawal of up to $5,000 is subject to 10% tax withholding, $5,000 to $15,000 is subject to 20%, and over $15,000 is subject to 30% tax withholding. In Quebec, the applicable rates are 5%, 10% and 15% federal tax, with 16% provincial tax withheld regardless of the amount.
So, if you took a withdrawal of over $15,000, Bob, you would have 30% tax withheld outside Quebec. But remember, when you file your tax return, that income may be subject to a lower or higher tax rate and result in a refund or balance owing.
One strategy is to consider smaller withdrawals of $5,000 or less so the tax withholding is only 10%. But remember, you could still owe more tax on April 30, so this isn’t a tax reduction strategy overall, just a strategy to increase cash flow in the short-term.
Another option, Bob, if you need a large withdrawal from a RRIF account, is to try to stagger it over two years, especially if it may be an isolated situation. You may be able to, for example, take half out this year and half next year. If the withdrawal is for an expense that needs to be paid immediately, a withdrawal from your Tax Free Savings Account (TFSA) or even a line of credit could help cover the expense, with your TFSA replenished or line of credit paid off in January with a fresh RRIF withdrawal.
If this were an isolated situation, splitting the RRIF income over two years may result in tax savings and reduce or eliminate a loss of government benefits like Old Age Security (OAS) or Guaranteed Income Supplement (GIS).
I’m not going to suggest that using your RRIF, TFSA, line of credit, or any other source is the “best” option for covering an extraordinary expense. It’s hard to say broadly that one is better than another. It really depends on your personal situation.
You should consider government benefits, future expenses, expected inheritances, plans to downsize your home, and so on. Developing a retirement plan on your own or with a professional can make this planning easier.
But if you are drawing down your RRIF heavily at a rate that may deplete it during your lifetime, that may be one indication you should consider other funding sources like your TFSA in conjunction with your RRIF, Bob. There’s no point in drawing your RRIF to zero by 85 simply to preserve a large TFSA.
Retirement income planning is more art than science, but the best pieces of advice I can give are: 1) try your best to plan where money will come from this month, this year and next year; 2) try your best to minimize lifetime taxes and not necessarily just this year’s taxes.
Good luck, Bob.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.
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