Tag Archives: RRIFs

Retired Money: Can an RRSP or a RRIF ever be “too large?”

Posted By |
MoneySense.ca

My latest MoneySense Retired Money column looks at a problem some think is a nice one for retirees to have: can an RRSP — and ultimately a RRIF — ever become too large? You can find the full column by clicking on the adjacent highlighted headline: How large an RRSP is too large for Retirement?

This is a surprisingly controversial topic. Some financial advisors advocate “melting down” RRSPs in the interim period between full employment and the end of one’s 71st year, when RRIFs are typically slated to begin their annual (and taxable) minimum withdrawals. Usually, RRSP meltdowns occur in your 60s: I began to do so personally a few years ago, albeit within the confines of a very conservative approach to the 4% Rule.

As the piece points out, tax does start to become problematic upon the death of the first member of a senior couple. At that point, a couple no longer has the advantage of having two sets of income streams taxed in two sets of hands: ideally in lower tax brackets.

True, the death of the first spouse may not be a huge tax problem, since the proceeds of RRSPs and RRIFs pass tax-free to the survivor, assuming proper beneficiary designations. But that does result in a far larger RRIF in the hands of the survivor, which means much of the rising annual taxable RRIF withdrawals may start to occur in the higher tax brackets. And of course if both members of a couple die with a huge combined RRIF, their heirs may share half the estate with the Canada Revenue Agency.

For many seniors, the main reason to start drawing down early on an RRSP is to avoid or minimize clawbacks of Old Age Security (OAS) benefits, which begin for most at age 65. One guideline is any RRSP or RRIF that exceeds the $77,580 (in 2019) threshold where OAS benefits begin to get clawed back. Of course you also need to consider your other income sources, including employer pensions, CPP and non-registered income.

Adrian Mastracci

“A nice problem to have.”

But the MoneySense column also introduces the counterargument nicely articulated by Adrian Mastracci, fiduciary portfolio manager with Vancouver-based Lycos Asset Management. Mastracci, who is also a blogger and occasional contributor to the Hub, is fond of saying to clients “A too-large RRSP is a nice problem to have!”

Retirement can last a long time: from 65 to the mid 90s can be three decades: a long time for portfolios to keep delivering. A larger RRIF down the road gives retirees more financial options, given the ravages of inflation, rising life expectancies, possible losses in bear markets, low-return environments and rising healthcare costs in one’s twilight years. These factors are beyond investors’ control, in which case Mastracci quips, “So much for the too-big RRSP.”

 

Retired Money: How retirees can lower RRIF tax shock by taxing “at source” wherever possible

Posted By |

My latest MoneySense column takes a look at the supposed “tax nightmare” new retirees sometimes face on the forced annual (and taxable) withdrawals of Registered Retirement Income Funds or RRIFs. Click on the highlighted headline for the full article: How to avoid tax payment nightmares when the RRIF withdrawals start.

It’s a simple idea really. Salaried employees take for granted the automatic deduction of income taxes “at source.” They receive their regular paycheque with “net” or after-tax deposits that go directly into their bank accounts.

RRIFs are famously taxable: once you reach the end of your 71styear, you are required to pay an ever-rising minimum percentage withdrawal, all fully taxed like earned income or interest. However, notes Aaron Hector, a financial planner with Calgary-based Doherty & Bryant Financial Strategists, there is no mandatory withholding tax on RRIFs, unlike the 10, 20% or 30% tax that must be withheld at source on RRSP withdrawals (which rises with amount withdrawn.)

Fortunately, you can ask your financial institution to deduct tax at source every time you make a RRIF withdrawal. Alternatively, new retirees or semi-retirees may wait till 71 to start a RRIF but choose to withdraw money from their RRSP whenever they need it during their 60s. Here, the problem is the minimum withholding required can prove to be inadequate if you take out chunks of RRSP cash that are too small. Take them out in $5,000 chunks or less and the 10% (5% in Quebec) withholding tax is unlikely to be sufficient once you file your annual return.

Try and take out at least an amount between $5,000 and $15,000, which results in a 20% withholding tax (10% in Quebec.). Better yet, make the withdrawals $15,000 or more and pay the 30% withholding tax (15% in Quebec). Don’t fret that this may be “too much” tax: if so, it will be rectified once you file your next tax return. You can find a summary of RRSP withholding rates at this Government of Canada website.

Hector says RRIF withdrawals in excess of the minimum annual required payment are treated the same as regular RRSP withdrawals for withholding tax. So if your minimum RRIF payment one year is $50,000 but you withdraw $100,000, the extra $50,000 will be taxed at 30% on withdrawals and come tax time, you’d pay tax on the entire $100,000. You can elect to have taxes withheld at source on the minimum RRIF payments as well: Hector estimates a third of his clients do just that. Others may end up making quarterly tax installments instead.

This situation is aggravated by the fact non-registered investment income is typically taxable.             Fortunately, you can choose to deliberately overtax yourself as you go on many common sources of retirement income: if you receive pensions from former employers and/or the Government (CPP, OAS), you can set things up to mimic the “taxed at source” setup salaried workers have. While not mandatory, pension administrators will deduct whatever percentage of tax you wish to arrange with them, whether a minimal amount or a near-confiscatory 50%, or somewhere between those extremes.

In my case, I set 30% as my withholding tax on corporate pensions, 25% on OAS and eventually the same amount for CPP. You may feel small pensions don’t have to be taxed at source if they are less than the Basic Personal Amount that is tax free to everyone: $11,809 in 2018, $12,609 in 2019.

The alternative is quarterly tax installments. Retired advisor Warren Baldwin says theCRA sends notices for payments based on simple arithmetic applied to the previous year’s taxes. “So if, for example, 2017 was a high-income year and you had a high tax liability on filing, CRA will request large payments in March and June of 2019. If income and the liability declines in 2018/19, then you might have overpaid and need to wait until spring of 2020 for the refund.”

Ideally, things will balance out when it comes time to file your taxes: if you went overboard in taxing yourself at source, you may end up with a refund; if you underestimated your taxes due, you may end up having to cut yet another cheque to Ottawa. Some object to giving the CRA an “interest-free” loan but personally, I’d rather receive a small refund than have to pay still more at tax time.

Retired Money: How the financial industry may use ALDAs and VLPAs as Longevity Insurance

Posted By |
Finance professor Moshe Milevsky welcomes industry’s implementation of academic longevity insurance theories

My latest MoneySense Retired Money column looks at two longevity-related financial products that the industry may develop after the road to them was paved in the March 2019 federal budget. You can access the full column by clicking on the highlighted headline: A new kind of annuity designed to help Canadian retirees live well, for longer.

Once they are created by the industry, hopefully in the next year, these new products will introduce an element of what finance professor Moshe Milevsky has described as “tontine thinking.” In the most extreme example, a tontine — often depicted in fictional work like the film The Wrong Box — features a pool of money that ultimately goes to the person who outlives everyone else. In other words, everyone chips in some money and the person who outlives the rest gets most of the pot. As you can imagine at its most extreme, this can lead to some nefarious scenarios and skulduggery, which is why you occasionally see tontines dramatized in film, as in The Wrong Box, and also TV, as in at least one episode of the Agatha Christie TV adaption of Miss Marple.

Fortunately, the Budget doesn’t propose something quite as dramatic as classic tontines but get used to the following two acronyms if and when the insurance and pension industries start to develop them: ALDA is an acronym for Advanced Life Deferred Annuity.  As of 2020, ALDAs could become an investment option for those currently with money invested in registered plans like RRSPs or RRIFs,  Defined Contribution (DC) Registered Pension Plans and Pooled Registered Pension Plans (PRPPs).

The other type of annuity proposed are Variable Payment Life Annuities (VPLAs), for DC RPPs and PRPPs, which would pool investment risk in groups of at least 10 people. Not quite tontines in the classic academic sense but with the pooling of risk VPLAs certainly have an element of “tontine thinking.”

The budget says a VLPA “will provide payments that vary based on the investment performance of the underlying annuities fund and on the mortality experience of VLPA annuitants.” That means – unlike traditional Defined Benefit pensions – payments could fluctuate year over year.

There is precedent for pooled-risk DC pensions: The University of British Columbia’s faculty pension plan has run such an option for its DC plan members since 1967.

The budget said Ottawa will consult on potential changes to federal pension benefits legislation to accommodate VPLAs for federally regulated PRPPs and DC RPPs, and may need to amend provincial legislation. But it’s ALDAs that initially captured the attention of retirement experts, in part because of its ability to push off taxable minimum RRIF payments.

Up to $150,000 of registered funds can go into an ALDA

An ALDA lets you put up to 25% of qualified registered funds into the purchase of an annuity. The lifetime maximum is $150,000, indexed to inflation after 2020. Beyond that limit you are subject to a penalty tax of 1% per month on the excess portion. Continue Reading…

3 Reasons to delay taking CPP until age 70

Posted By |

 

It might seem counterintuitive to spend down your own retirement savings while at the same time deferring government benefits such as CPP and OAS past age 65. But that’s precisely the type of strategy that can increase your income, save on taxes, and protect against outliving your money.

Here are three reasons to take CPP at age 70:

1.)  Enhanced CPP Benefit – Get up to 42 per cent more!

The standard age to take your CPP benefits is at 65, but you can take your retirement pension as early as 60 or as late as age 70. It might sound like a good idea to take CPP as soon as you’re eligible but you should know that by doing so you’ll forfeit 7.2 per cent each year you receive it before age 65.

Indeed, you’ll get up to 36 per cent less CPP if you take it immediately at age 60 rather than waiting until age 65. That alone should give you pause before deciding to take CPP early. What about taking it later?

There’s a strong incentive for deferring your CPP benefits past age 65. You’ll receive 8.4 per cent more each year that you delay taking CPP (up to a maximum of 42 per cent more if you take CPP at age 70). Note there is no incentive to delay taking CPP after age 70.

Let’s show a quick example. The maximum monthly CPP payment one could receive at age 65 (in 2019) is $1,154.58. Most people don’t receive the maximum, however, so we’ll use the average amount for new beneficiaries, which is $664.41 per month. Now let’s convert that to an annual amount for this example = $7,973.

Suppose our retiree decides to take her CPP benefits at the earliest possible time (age 60). That annual amount will get reduced by 36 per cent, from $7,973 to $5,862: a loss of $2,111 per year.

Now suppose she waits until age 70 to take her CPP benefits. Her annual benefits will increase by 42 per cent, giving her a total of $11,322. That’s an increase of $3,349 per year for her lifetime (indexed to inflation).

2.) Save on taxes from mandatory RRSP withdrawals and OAS clawbacks

Mandatory minimum withdrawal schedules are a big bone of contention for retirees when they convert their RRSP to an RRIF. For larger RRIFs, the mandatory withdrawals can trigger OAS clawbacks and give the retiree more income than he or she needs in a given year.

The gradual increase in the percentage withdrawn also does not jive with our belief in the 4 per cent rule, which will help our money last a lifetime.

You can withdraw from an RRSP at anytime, however, and doing so may come in handy for those who retire early (say between age 55-64). That’s because you can begin modest drawdowns of your retirement savings to augment a workplace pension or other savings to tide you over until age 65 or older.

Tax problems and OAS clawbacks occur when all of your retirement income streams collide simultaneously. But with a delayed CPP approach your RRSP will be much smaller by the time you’re forced to convert it to a RRIF and make minimum mandatory withdrawals. Continue Reading…

Federal Budget 2019: Liberals unveil $22.8 billion in new spending in pre-election budget

Posted By |

Not surprisingly, the Liberals’ fourth federal budget released Tuesday afternoon is the predicted pre-election spendathon targeting the two big voting blocks of Seniors and Millennials. You may wish to refresh this link from time to time, or check my Twitter feed at @JonChevreau. Also check out FP Live’s “Everything you need to know about Federal Budget 2019.”

One of the first reports out was the CBC: Liberals table a pre-election budget designed to ease Canadians’ anxieties. It said that Morneau’s fourth budget includes $22.8 billion in new spending. The 460-page document is titled Investing in the Middle Class. Not surprisingly, the CBC noted, there is no timeline for erasing the Deficit, projected to be $20 billion next year, then falling to $15 billion two years later, and then to $10 billion in 2023-24.

First-time home buyers can tap RRSPs for $35,000

As predicted, the Budget targets Millennials who are finding it hard to get a foot on the housing ladder. It  boosts the amount of money that can be withdrawn from RRSPs for a first-time home purchase, from the previous $25,000 to $35,000 ($70,000 for couples). Low-income seniors will be able to keep more of the Guaranteed Income Supplement (GIS) if they opt to remain in the workforce and safeguards are being introduced to protect employer pensions in the event of bankruptcies.

Among other spending initiatives is ensuring access to high-speed Internet by 2030 across the country, $1.2 billon over three years to help First Nations children access health and social services, an additional $739 million over five years to repair water systems on First Nations reserves, and a federal purchase incentive of up to $5,000 for electric battery or hydrogen fuel cell vehicles with sticker prices below $45,000.

Little wiggle room in a Recession

The Financial Post’s Kevin Carmichael filed a piece headlined “Liberals leave themselves little wiggle room in the event of a recession.” And Andrew Coyne commented that “the federal budget is a testament to the pleasures of endless growth. Forget productivity, tax cuts or investment.” One of his colourful quips was this:

“I’ve said before that these are deficits of choice, rather than necessity. A better way to describe them might be deficits for show.”

The Globe noted that the $23-billion in new spending spans more than a hundred different areas, although the focus is on new home buyers and training programs for workers. Later this year there will be $1.25 billion (over 3 years) “First Time Home Buyer Incentive” managed by the Canada Mortgage and Housing Corporation. The Globe added that “CMHC would put up 10 per cent of the price of a newly constructed home and 5 per cent of an existing home, and share in the homeowner’s equity.” To qualify you must be a first-time home buyer with annual household income below $120,000.

8 ways personal finances will be affected: GIS, CPP & more

G&M personal finance columnist Rob Carrick listed 8 ways the budget will impact ordinary citizens’ finances. He noted that seniors receiving the GIS will be able to earn $5,000 without affecting benefits, up from $3,500, and that there will also be an additional 50% exemption of up to $10,000. Contributors to the Canada Pension Plan who are 70 and older and haven’t applied for benefits will be “proactively enrolled” starting next year. Carrick said Ottawa says about 40,000 people over 70 miss out on CPP benefits averaging $302 a month. He also writes that the tax break on stock options will be limited for employees of larger, mature companies (as opposed to startups), with annual caps of $200,000 on stock options eligible for preferential tax treatment. Continue Reading…