Early Retirement RRIF

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.
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RonBruce
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Early Retirement RRIF

Post by RonBruce »

I’m hoping to retire before I hit the age of 60, hopefully around age 55.

When I retire (or the year before) would it not make some sense to convert my RRSPs into a RRIF? Even though I’d have a minimum amount to pull out every year that small portion would not have a withdrawal tax on it (of course there would be a withdrawal fee with iTrade but that is a different matter).

If I understand correctly this might save me a few hundred dollars in tax each year if nothing else. I’d still have to pull out more than the minimum amount every year but at least I’d save on something.

I’m in a low tax bracket at this point and figured it might be best to get the RRSP money out early. I’d like my RRSP dividends to be in my non-reg account though upon retiring I’d be living more on the withdrawn RRIF money than dividends.

Any threads about this or opinions?
Thanks for the help.
like_to_retire
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Re: Early Retirement RRIF

Post by like_to_retire »

RonBruce wrote: Even though I’d have a minimum amount to pull out every year that small portion would not have a withdrawal tax on it
But you would still pay tax at the end of the year once you fill out your tax return. The withdrawal tax is only a way for the government to get their share early rather than wait until the end of the year when everything is finally jived up on your return.

Sometimes it's worth it to melt down an RRSP early if it affects tax brackets later in retirement, especially around OAS clawback time.

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RonBruce
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Re: Early Retirement RRIF

Post by RonBruce »

Is there a better way to melt down an rrsp early?

I knew the withdrawn amount would count towards my 'income' for a certain year.
I find this rather confusing. Must research more.

Thanks for the help.
Davis
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Re: Early Retirement RRIF

Post by Davis »

I'm also pondering this. I agree with LTR - the tax is not the issue. Whether I pay withholding tax now and get some of it back at the end of the year or pay the tax all at the end of the year doesn't matter much. the amount of tax will be the same either way. It is only a timing issue.

What I am concerned about is that it looks like iTrade charges $50 for each withdrawal from an RRSP. If I'm retiring at 50, should I convert to a RRIF to reduce fees even if it means giving up flexibility? I cannot figure out from their website if there are withdrawal fees for RRIFs.
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Re: Early Retirement RRIF

Post by Davis »

RonBruce wrote:Is there a better way to melt down an rrsp early?

I knew the withdrawn amount would count towards my 'income' for a certain year.
I find this rather confusing. Must research more.

Thanks for the help.
You got a tax deduction when you put the money into the RRSP, so when you withdraw money, either from an RRSP or a RRIF, you have to pay the tax. Be very careful if someone tells you that they can structure a withdrawal to avoid tax. It is almost certainly a scam.
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AltaRed
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Re: Early Retirement RRIF

Post by AltaRed »

Davis wrote:What I am concerned about is that it looks like iTrade charges $50 for each withdrawal from an RRSP. If I'm retiring at 50, should I convert to a RRIF to reduce fees even if it means giving up flexibility? I cannot figure out from their website if there are withdrawal fees for RRIFs.
I don't believe any brokerage charges for the one mandated RRIF withdrawal each year. Ask them. Still, even if there is a fee, I cannot imagine a fee being a significant driver in the decision to RRIF early or not (or withdraw from an RRSP instead to maintain flexibility).
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RonBruce
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Re: Early Retirement RRIF

Post by RonBruce »

Davis wrote: You got a tax deduction when you put the money into the RRSP, so when you withdraw money, either from an RRSP or a RRIF, you have to pay the tax. Be very careful if someone tells you that they can structure a withdrawal to avoid tax. It is almost certainly a scam.
I understand. I'm not trying to avoid paying taxes just trying to figure out fees with iTrade like you are doing. Hmm.

With a RRIF supposedly there is a minimum amount you must take out each year but apparently you don't pay .... something... on that. Confusion here on my part. :?

Low income here so avoiding a bit of ... something... on the RRIF minimum sounded good but maybe not worth it. Not sure.
Thanks again.
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Re: Early Retirement RRIF

Post by twa2w »

I am not entirely sure what your getting at here but perhaps this is it.

1)many FI 's will charge a fee for a with drawal from an RSP but most will not charge for scheduled withdrawals from a RIF. They may charge for extra payments from a RIF.

2) withdrawals from a RIF are taxable income, however, if you only take out the required minimum annual payment, the FI holding your RIF is not required to withhold income tax. If you take out amounts exceeding your minimum required withdrawal, the FI is required to withhold tax.

If you take out your minimum with no tax withheld, you report this amount on your tax return and you may have to pay tax depending on your tax bracket.

If you take out more than your minimum and have tax with held, you agsin report these on your incone tax return. You then may have to pay more tax or you may get some back.

3) yes RIF 's are some what less flexible than a RSP in that you have to take a minimum paymemt each year and you have to ensure cash is available to make the withdrawal but other than that there is not much difference. You can always convert your RIF back to an RSP later if say you found a well paying job after retirement and no longer need the income from the RIF. Note you have to do this before age 71 and you have to take the minimum RIF payment for the year.
Depending on the size of your RSP, you have the option to convert only part of it to a RIF. Assuming you are not 71 this year.

4)remember too, if you convert to a RIF this year and want to take a payment this year, you can do so but there is no required minimum payment the year you convert to a RIF so there would be with holding tax.

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RonBruce
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Re: Early Retirement RRIF

Post by RonBruce »

twa2w wrote:I am not entirely sure what your getting at here but perhaps this is it.
...
Thanks that helps a lot. :D
cardhu
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Re: Early Retirement RRIF

Post by cardhu »

RonBruce wrote:I’m in a low tax bracket at this point and figured it might be best to get the RRSP money out early.
Depends what you plan to do with the money … if you’d be using the withdrawals to pay for your day-to-day living expenses, then they wouldn’t be “early” withdrawals at all, they’d be exactly on time … if you’d be withdrawing to reinvest the money, then it could very well make you poorer, although you haven’t provided enough info to say one way or the other.
I’d like my RRSP dividends to be in my non-reg account
Why? If your income is low, then you'd likely be better off leaving those dividend payers in RRSP.
Is there a better way to melt down an rrsp early?
Taking RRSP withdrawals while you’re still working (ie. early) is generally a bad idea … you’ll undoubtedly pay more tax than if you had waited until retirement to withdraw … taking RRSP withdrawals after you’ve left the workforce (ie. retired) isn’t “early” … its exactly the correct time.
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Re: Early Retirement RRIF

Post by nomad »

You are aware that you don't have to convert your entire RRSP savings into a RRIF until you are 71? I deal with ITrade and I have an RRSP and a RRIF.

I initially set up the RRIF with an amount that I planned to withdraw for the next five years, drawing down 20% of it each year in monthly installments, and keeping my income just below the higher tax bracket. Since I set this up a few years ago I have transferred further funds from the RRSP to the RRIF without incurring any fees.

Itrade does not charge a fee for the monthly withdrawals from a RRIF, but they do take off income tax.
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RonBruce
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Re: Early Retirement RRIF

Post by RonBruce »

nomad wrote:You are aware that you don't have to convert your entire RRSP savings into a RRIF until you are 71? I deal with ITrade and I have an ....

Itrade does not charge a fee for the monthly withdrawals from a RRIF, but they do take off income tax.
This is very good to know about iTrade and their RRIF fees because I wasn't sure.
I do realize about the age 71 thing.

Lots of things to think about. Thanks, everyone.
2of3aintbad
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Re: Early Retirement RRIF

Post by 2of3aintbad »

cardhu wrote:
I’d like my RRSP dividends to be in my non-reg account
Why? If your income is low, then you'd likely be better off leaving those dividend payers in RRSP.
I think that the income tax rate on dividends eligible for the dividend tax credit is always lower than the marginal tax rate. In fact, for those with low income, the tax rate is negative. So it makes sense to use the non-reg account.
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