A Savvy RRSP Withdrawal Strategy to Minimize Taxes in Retirement
Let me tell you a story…
I had an 85-year-old friend, let’s call her Georgia, who had $600,000 left in her registered retirement income fund (RRIF).
But wait, what is an RRIF?
In case you don’t know, once you reach a certain age (currently age 71), you are required to convert your Registered Retirement Savings Plan (RRSP) into an RRIF or use the funds to purchase an annuity.
With an RRIF, you withdraw a minimum amount of money each year, which is determined by a formula based on your age and the balance in your account.
The withdrawals are considered taxable income, so you must pay income tax on the amounts you receive.
You can choose to withdraw more than the minimum amount if you need additional income, but keep in mind that doing so will increase your tax liability.
Back to the story…
Unfortunately, Georgia passed away earlier than anyone expected. She had 2 children and the tax bill on her $600,000 was almost 50%!
That means she would owe almost $300,000 in tax!
Her children would have been responsible for making sure that tax was paid on her estate which leaves them with a much lower inheritance than I’m sure Georgia or her children were hoping for.
While you may be thinking that it’s just greedy people being greedy, the point is, if you plan your finances correctly, there is a way to ensure that your family gets all of your hard-earned money after you pass.
Planning your retirement withdrawals is important because you pay tax on every penny and the goal is to pay the government the least amount possible.
It’s important to know that when you are putting money into your RRSPs, there are consequences when you decide to take it out, or in Georgia’s case when she didn’t plan ahead to reduce the amount of money in her RRIF and/or her RRSPs.
In Georgia’s situation, if we would have been her financial planner, we would’ve advised her to:
Increase her annual withdrawals
Deposit her withdrawals into a non-registered account. This would have allowed for a much lower tax bill when she did pass.
As she was making her money, it would’ve been beneficial to max out her TFSA and put her children as beneficiaries rather than putting all her income into her RRSPs
You find more information on TFSAs here.
Furthermore, Georgia is just one situation that I’ve heard of - and withdrawing money from your Registered Retirement Savings Plan (RRSP) in a strategic manner can help you minimize taxes in retirement.
So who are we?
We’re CC & Associates, a financial service provider helping women and families prepare for their futures and get their finances organized so they can make big purchases, save for retirement, and stop worrying about money.
Book a call with us here for 15-min a Q&A call, where we will answer any question you have about budgeting, investments, or insurance.
Here are a few tips for a savvy RRSP withdrawal strategy:
1. Know the rules
When you reach age 71, you are required to convert your RRSP into a Registered Retirement Income Fund (RRIF), as explained earlier.
At that point, you will be required to withdraw a minimum amount each year, which increases with age. Understanding these rules can help you plan your withdrawals more effectively, however, it can be extremely overwhelming and complicated.
We can help - reach out, and we will look over your portfolio for no charge.
2. Consider your other sources of income
When planning your RRIF withdrawals, take into account any other sources of income you may have, such as pensions, government benefits, or rental income. This can help you avoid moving into a higher tax bracket.
Download our budget worksheet that will help you strategize and prioritize your financial goals.
3. Use income-splitting strategies
If you have a spouse or common-law partner, you can split your RRIF income with them, which can help reduce your overall tax bill.
Reach out if you want more information about this strategy.
4. Be strategic about your withdrawals
Consider withdrawing enough each year to meet your income needs, but not so much that you move into a higher tax bracket.
You may also want to consider taking advantage of years when you have a lower income to withdraw more from your RRIF.
In Georgia’s case, we would have
5. Consult with CC&Associate - we can help!
Planning your RRSP/RRIF withdrawals can be complex, and it's important to consider your individual circumstances. Every individual’s situation is different.
It’s incredibly important to develop a withdrawal strategy that is tailored to your needs and goals.