My latest Globe & Mail Wealth column has just been published on page B9 of the Tuesday paper and online, which you can access by clicking on the highlighted headline here: The secret to paying less tax in retirement.
As one expert cited — Doug Dahmer, who often guest blogs here at the Hub — tax is perhaps the single biggest expense in Retirement. This often becomes apparent when those growing RRSPs the Boomers and others have been accumulating are forced to become RRIFs or Registered Retirement Income Funds at the end of age 71, at which point they become taxable at your highest marginal rate, just like interest or employment income. Million-dollar RRSPs are not that uncommon, according to the sources consulted for the column, whether individually or shared by couples.
(I say”forced” but of course there are two alternative options: annuitize or cash out. Very few people choose the latter option, while annuitization or partial annuitiization is certainly a valid option as you progress through your 70s, although ideally when interest rates are higher.)
The initial RRIF withdrawal percentage is 5.28% at 71 but minimum withdrawal rates rise steadily over time, hitting 6.82% at age 80, 10.21% by 88 and reach 20% by age 95 and beyond.
Draw down RRSPs/RRIFs early, delay CPP/OAS to 70
As the article notes, this has two implications: one, since it’s unlikely most investors with balanced portfolios will generate returns as high as the withdrawal percentages, most RRIF recipients will start breaking into capital. Second, they may be forced to withdraw more than they need to live on, and pay tax as they do. For many clients, Dahmer suggests withdrawing from RRSPs earlier than necessary — or starting a RRIF early — may be the thing to do if you find yourself in a lower tax bracket in your 60s: typically after full time employment. And if possible, he suggests deferring Canada Pension Plan (CPP) and/or Old Age Security (OAS) benefits until age 70.
Dahmer has created an app called the Retirement Navigator, to help investors optimize withdrawals of various retirement income sources with their taxes. Sounding like the Fram Filter advertisements, he says: “It usually means paying a little more taxes sooner to pay a lot less later on.”
Dahmer says if you can’t earn more than 8% a year in your RRSP, you’re better off drawing it down and enjoying the 8.4% guaranteed annual improvement on your CPP each year you defer it. This also gives you more of an inflation-indexed guaranteed recurring income you can’t outlive.
Dahmer gets some support from retired actuary and pension expert Malcolm Hamilton, who says because of the way the math works even if an RRSP earns just 6%, deferring CPP can work, and with less risk. “Until interest rates move up to 5 or 6%, deferring the CPP looks like a good choice.”
Another regular Hub blogger, Adrian Mastracci, provides a dissenting view. He’s all for making RRSPs and RRIFs as large as possible and paying whatever tax is due, quipping that a huge RRSP is “a nice problem to have.”
Discussing this Tuesday night on CBC On the Money
PS: I discussed the G&M article on Tuesday evening after 7 pm on CBC On the Money. The link to the full show is here: my segment is about 20 minutes in.