“Retirement at sixty-five is ridiculous. When I was sixty-five I still had pimples.”— George Burns (1896–1996) Comedian, actor, singer and writer
There are three retirement accounts everyone ought to understand. They are the RRSP, the TFSA and the RRIF (Registered Retirement Income Fund). I submit that the early part of each year is preferred to review the RRSP and TFSA. That leaves the RRIF to be dealt with well before year-end.
Start paying special attention to planning the RRIF, even if you don’t yet need one.
Be very mindful of the RRIF. Recognise its purpose and how it complements the other two accounts. Review it periodically to ensure it stays on track.
The RRIF is firmly entrenched as a prominent retirement planning vehicle, serving as an essential foundation of retirement nest eggs. For example, starting a RRIF at 71 implies long planning, often to age 90 or more: especially if there is a younger spouse or common-law partner.
Three conversion choices for RRSPs
RRIFs typically result from the aftermath of mandatory RRSP conversions. Three conversion choices include cashing the RRSP, purchasing a variety of annuities and using the RRIF account. The RRIF is most popular because it provides considerable flexibility. Avoid cashing RRSPs.
Are million-dollar RRSPs a looming tax problem for soon-to-retire baby boomers or simply a nice problem to have?
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. Continue Reading…
It describes what one source describes as a “nice problem to have.” That’s having accumulated so much money in a Registered Retirement Savings Plan (RRSP) that it presents a lucrative source of tax revenue for the federal Government once you reach age 71 and have to start making forced annual — and taxable — withdrawals from a Registered Retirement Income Fund or RRIF.
Doug Dahmer
This is a huge tipping point: moving from Wealth Accumulation to De-Accumulation, or what this site calls Decumulation. Suddenly, you’re confronted with the flipside of what CIBC Wealth’s Jamie Golombek has famously dubbed “being blinded by the refund,” a reference to the juicy tax deductions we enjoy by making regular RRSP contributions during our high-earning high-taxed working years.
The article quotes regular Hub contributor Doug Dahmer – president of Burlington, Ont.-based Emeritus Retirement Income Specialists, and pictured here – who says baby boomers have a huge looming tax problem ahead with their 6-figure RRSPs once it comes time to start withdrawing money or securities from them. The FP piece references Dahmer’s Hub blog earlier this year: Better Retirement Choices: An elegantly simple solution.
The case for early RRSP withdrawals and delaying Government benefits
As Dahmer has related here and elsewhere, he does believe RRSPs can get too large (at least if you’re averse to generating large amounts of taxable income down the road), so he is an advocate of drawing down RRSPs during the low-taxed years that many semi-retirees may experience somewhere between corporate life (typically early 60s) until it’s RRIF time in your early 70s. Continue Reading…
A successful retirement begins with a successful retirement income strategy.
One of the things that investors of all ages fear is that they won’t have a good financial plan in place so that they have enough retirement income to live on once they’ve stopped working.
Here are some ways to ease that anxiety:
In retirement, try to even out (equalize) your income with your spouse’s income, to lower overall taxes. Here’s how:
1.) Have the higher income spouse pay the household bills
The easiest way to even out income between two spouses is to have the higher-income spouse pay the mortgage, grocery bills, medical costs, insurance and other non-deductible costs of family life.
2.) Set up a spousal RRSP
Registered retirement savings plans, or RRSPs, are a form of tax-deferred savings plan designed to help investors save for retirement. RRSP contributions are tax deductible, and the investments grow tax-free.
3.) Pay interest on your spouse’s investment loans
If the lower-income spouse takes out an investment loan from a third party, such as a bank, the higher-income spouse can pay the interest on that loan.
RRIFs are a great long-term retirement income strategy
Fram Oil Filters: “Pay me now or pay me later.” (YouTube.com)
My latest MoneySense Retired Money column was published earlier today: click on the headline Retirement Tax Tips for full version.
As I say at the end of the column, after decades of the RRSP contribution habit, I admit it goes against the grain to start decumulating. And even more so, it’s counterintuitive to pay taxes on investment funds before you HAVE to.
However, to paraphrase the famous Fram Oil Filters TV commercial, you can pay me now or you can pay me more later — much more later. (For the famous 1972 “Pay me now or pay me later” Fram Filter ad, click on this YouTube link.)
Since tax is one of the biggest, if not THE biggest expense in retirement, I’d rather pay a little tax now prematurely than a lot of tax later.
Live on early RRSP withdrawals and defer CPP benefits
Emeritus’s Doug Dammer
So what has this got to do with RRSPs and taxes? As the column points out in detail, citing Emeritus Retirement Solutions’ Doug Dahmer, at some point those great tax refunds from decades of RRSP contributions eventually come back to haunt you. Usually that’s when you turn 71 and are forced to start making annual, and taxable, withdrawals from Registered Retirement Income Funds or RRIFs. (you can opt instead to annuitize or to cash out and pay a ton of tax upfront).
In practice, most will choose to take RRIF withdrawals starting at the end of the year you turn 71, but if you also have a good employer pension, the usual government pensions and other income sources, there’s a good chance some of those withdrawals will be at or near the top marginal tax rate, which these days ranges from 46% to more than 50%, depending on your income and the province in which you reside. And as the MoneySense column mentions, if you’re in the OAS clawback zone, you may have to add a further 15% to the government’s haul.
But if you’re semi-retired and “basking” in a relatively low tax bracket in your Sixties, you may be able to start withdrawing RRSP funds earlier than necessary, which may make sense if it’s only being taxed at 20 or 30%. Plus, as Dahmer suggests, by living on some of this relatively low taxed early RRSP funds you can defer the receipt of Canada Pension Plan (CPP) benefits and possibly Old Age Security benefits to as late as 70.
Every year you can defer taking CPP by living instead on early RRSP withdrawals, the CPP benefit will be 8.4% higher. Dahmer poses the rhetorical question whether your RRSP can generate an annual return of 8.4%. These days you certainly can’t generate that return with fixed-income and after all, we’re talking about people who by now should have a good percentage (perhaps 50%) in fixed-income. You may or may not get 8.4% from stocks but if you do, you’re also subjecting your portfolio to possible capital losses.
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“Retirement at sixty-five is ridiculous. When I was sixty-five I still had pimples.” — George Burns (1896–1996) Comedian, actor, singer and writer
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