RRSP to RRIF - Questions

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.
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kcowan
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Post by kcowan »

Springbok wrote:It is not an additional credit. It is just the Pension Income Credit. Nothing new, we have been doing it for years.
True.

The new element is the ability to split the income with spouse and generate an added $2000 deduction for her.
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Post by Springbok »

kcowan wrote:
Springbok wrote:It is not an additional credit. It is just the Pension Income Credit. Nothing new, we have been doing it for years.
True.

The new element is the ability to split the income with spouse and generate an added $2000 deduction for her.
Yes, that's right. But how many spouses have no registered savings? Does not take much to come up with a $2k annual withdrawal.

In our case, I don't see much benefit from income splitting, because, having had our own business, we were able to arrange that all along the way. Only possibility may be when I get to compulsory RRIF withdrawal before my wife does. For a few years, we may be able to income split, but not sure what net effect will be yet. If we both stay in same bracket, total tax may not change much.
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Post by kcowan »

Springbok wrote:For a few years, we may be able to income split, but not sure what net effect will be yet. If we both stay in same bracket, total tax may not change much.
It is the few years that I was thinking about. Generally, one reaches 65 and can share the pension and get the extra $2000 until the spouse also reahces 65. But not a big deal for sure. Avoiding the reduction in age exemption would seem to offer more savings.
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Post by Bylo Selhi »

Splitting can help you retire earlier
Jamie Golombek wrote:What if you don't participate in a Defined Benefit plan but save for your retirement through an RRSP? In that case, you're out of luck as you can't split your registered savings with a spouse or partner until you're at least 65 years old.

In an attempt to respond to complaints about this inequity, the government stated: "Without the age-65 eligibility rule, many individuals who are not retired could gain significant tax advantages well before they attain age 65 by arranging to withdraw money each year as RRSP annuity or RRIF income while still saving for retirement. Individuals in receipt of RPP income, on the other hand, generally have little control over the timing of their pension payments -- they usually only receive such payments when they are retired."

Clearly, the law discriminates against Boomers who wish to retire early but are not members of Defined Benefit plans.

For the legions of these people, the prior use of spousal RRSPs may provide the tax savings needed to justify early retirement -- or savings roughly equivalent to what would have been available through the new pension splitting rules.
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Post by kcowan »

Bylo Selhi wrote:Splitting can help you retire earlier
Jamie Golombek wrote:For the legions of these people, the prior use of spousal RRSPs may provide the tax savings needed to justify early retirement -- or savings roughly equivalent to what would have been available through the new pension splitting rules.
Yes that was my impressions as well. By making spousal contributions to RRSPs, they already had the splitting potential benefits that are just now being made available to DB retirees. And those with DB pensions had severely curtailed contribution room to RRSPs during all their years of employment. So it was difficult to do any serious splitting.
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Withdrawals from RRSP before change to RRIF?

Post by Dilettante72 »

This forum is great, thanks to all the posters. I hope I can one day contribute more directly than by asking questions, but here goes...

I offered my help to my mother with her finances and I'm now in charge of handling half of her assets (the other half remaining in a balanced mutual fund with a not-too-obscene MER of 1% in her RRSP). I've done quite a bit of research when making my own financial plan but some I have some questions about her situation.
My mother just retired at 65. The portfolio I'm dealing with used to be managed through a broker and I'm converting her numerous mutual funds (average MER of 2.4%, gasp) to ETFs and aiming for a 50-50% stock/bunds mix (instead of the 80/20 split she had, re-gasp). 25% of the portfolio is non-registered. I have three questions, not quite related:

1) Starting in 6 years from now, I my understanding is that the RRSP will become a RRIF, and she'll have to make substantial withdrawals (say ~90k$). In the meantime though she'll have very little taxable income. Her accountant suggested to take this opportunity to withdraw some money from the RRSP each of these 6 years to pay taxes at a reduced tax bracket. I understand the argument but it still kind of goes against my intuition, so I ask: is it a typical strategy to withdraw "preemptively" from a RRSP in the years before a change to a RRIF?

2) In Shake's primer it is stated that withdrawals should be done with maturing bonds. I'm always seeing the registered and non-registered portion as a whole and allocate for tax efficiency, so I don't understand where this comes from. Since we can transfer in kind out of a RRIF (right?), I'd be inclined to think of withdrawals as simple transfers between the two accounts; the rest is handled through rebalancing. What am I missing?

3) In her non-registered account, she has about 80k$ is in three stocks (TA, TRP and BMO), half of which would be capital gains if sold (to buy XIU instead, say). I know tax considerations should come second, but I'm leaning on keeping these and simply considering them as CDN equities in the whole allocation since they're quite reasonable dividend paying stocks. Am I wrong in thinking that the tax deferral is worth the reduction in diversification?

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Post by marcharry »

I will only comment on #3. Why would you not sell those non-reg stocks over the next 6 years(BMO etc). Her tax rate will not go down if she is withdrawing 90K/year. Her period of lowest income is now and you are trying to lighten up on equities. Unless you foresee a period when her marginal rate is lower than deferring the cap gains will not achieve anything.
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Post by brucecohen »

RE: #1

The RRSP must be converted to an income stream generator by the end of the year in which your mother turns 71, and the first withdrawal must be made by the end of the year in which she turns 72. So her tax shelter could run a bit longer than you appear to think.

The minimum withdrawal rate at age 72 will be 7.48% of the plan's value on Jan 1 of that year. (The rate at age 71 = 7.38%) So the projection of a $90,000 withdrawal implies that you expect to be worth $1.2 million at that time. Is that correct?

(FYI: While the withdrawal doesn't have to be made until year's end, the minimum rate is applied to the plan's value at Jan 1 of that year.)

Does your mom have a workplace pension that pays her at least $2,000/year? If not, she should open a RRIF now and move in enough money to generate a $2,000 withdrawal annually. (Remember: there's no limit on RRIF withdrawals) Since she's 65, that will generate a $2,000 pension income credit for her. This offsets $2,000 of low bracket tax.

If her projected RRIF value really is $1.2 million and if she's currently in a lower tax bracket, it would pay to draw down on the RRSP. The tricky part is figuring out by how much. If $90K was withdrawn this year, the top $15,643 would get taxed at 43.41% if your mother's an Ontario resident. But the tax brackets are inflation-indexed and we're talking a delay of up to 7 years. If the CPI averages 2%, Ontario's 43.41% bracket would then start at $85,413. You and/or the accountant should:

1. Determine mom's annual income retirement until then
2. Mix and match various sources to optimize the tax efficiency of that income. Entirely off the top of my head -- without any real thought -- I'm picturing a scenario where she creates enough RRIF income to get the $2,000 pension credit and fill the basic personal amount, which is tax-free for everyone. I forget whether that's $9,000 or $10,000. Then top up to the required level by determining optimal combination of dividends, cap gains and accelerated RRSP/RRIF withdrawal.

* Consider but don't get transfixed on the OAS clawback. It now kicks in at about $65K and is fully indexed to CPI. So, assuming 2% CPI, the threshold will be $74K+ in 7 years.
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Post by Shakespeare »

In Shake's primer it is stated that withdrawals should be done with maturing bonds
That's not really what it says. Withdrawals can come from different sources, but if you sell equities at a time they are low, you will kill the portfolio.

The easiest approach is to set an asset mix and sell whatever is above allocation for cash withdrawals or exchanges.


Earlier this week, I sold some XSP from within my RRSP. A stock (FTS) will be swapped in from my non-registered account to access the cash. The tax due will be only about $100. But I don't expect forced withdrawals in the $90K range in a few years.
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Post by AltaRed »

brucecohen wrote:Does your mom have a workplace pension that pays her at least $2,000/year? If not, she should open a RRIF now and move in enough money to generate a $2,000 withdrawal annually. (Remember: there's no limit on RRIF withdrawals) Since she's 65, that will generate a $2,000 pension income credit for her. This offsets $2,000 of low bracket tax.
IF she also draws on CPP, then I would assume the CPP qualifies for the $2000 pension credit and starting an RRIF would not be necessary (or prudent).

I agree with Marcherry's comment that selling some equities each year from the taxable account would be more tax efficient than being fully taxed on RRSP/RRIF withdrawals.
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Post by brucecohen »

AltaRed wrote:IF she also draws on CPP, then I would assume the CPP qualifies for the $2000 pension credit and starting an RRIF would not be necessary (or prudent).
Neither CPP nor OAS qualify.
I agree with Marcherry's comment that selling some equities each year from the taxable account would be more tax efficient than being fully taxed on RRSP/RRIF withdrawals.
That would be more tax-efficient today but you also have to look at the impact of forced fully taxable RRIF withdrawals down the road. Doing some RRSP/RRIF withdrawals now means you're prepaying tax at a lower rate than would otherwise apply. Whether that makes sense depends on the time value of the money and the gap between today's MTR and the future's.
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Post by Dilettante72 »

Thanks for the replies so far. I'm relieved to see that my question was not too simple after all.

To answer some questions that were asked (and sorry I didn't specify the following info):
- yes, the full RRSP value should be around in the 1.2M$ range if no withdrawal is made before then.
- she's a Quebec resident
- she has no work pension plan but will draw from Quebec Pension Plan (I presume this replaces CPP for Quebec residents?)

#3
marcharry wrote:I will only comment on #3. Why would you not sell those non-reg stocks over the next 6 years(BMO etc). Her tax rate will not go down if she is withdrawing 90K/year. Her period of lowest income is now and you are trying to lighten up on equities. Unless you foresee a period when her marginal rate is lower than deferring the cap gains will not achieve anything.
Indeed, if the BMO etc equities are to be sold in the next 10 years, then yes, they should definitely be sold while the marginal tax rate is low (like now). But they could hopefully be kept for quite a bit longer, since in a couple of years the withdrawals from the RRIF can be sold first. For argument's sake, if these were some variation on XIU, would I prefer to sell them in 15 years (at a higher marginal rate) than today, or are there cases where one should incur capital gains much in advance (the inverse of a superficial loss?)

#2
Shakespeare wrote:Withdrawals can come from different sources, but if you sell equities at a time they are low, you will kill the portfolio. The easiest approach is to set an asset mix and sell whatever is above allocation for cash withdrawals or exchanges.
Straight from the source :-) Thanks, glad to see my understanding was correct, then.

#1
From what I read so far, in particular brucecohen's post, I should then definitely increase her taxable income to fill the lower tax brackets, be that through withdrawals or capital gains event thought there's probably not a perfect answer as to how much.
Still confused about the strategy of creating a RRIF for ~12k$ to withdraw 2k$ yearly: when should it be done or not?

Thanks!
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Post by Shakespeare »

Straight from the source
There's a particular problem with RIFs at very high mandated withdrawal rates in which sales will likely be necessary. When the withdrawal rate starts approaching 10% or more, extra planning is going to be needed.

Although equities can be swapped out, rather than sold, enough cash needs to be in the RRIF to pay the associated witholding tax.
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Post by IdOp »

Shakespeare wrote:There's a particular problem with RIFs at very high mandated withdrawal rates in which sales will likely be necessary. When the withdrawal rate starts approaching 10% or more, extra planning is going to be needed.

Although equities can be swapped out, rather than sold, enough cash needs to be in the RRIF to pay the associated witholding tax.
IIRC, RIF withholding tax only applies to the amount, if any, withdrawn in excess of the mandated withdrawal. I.e., even if the minimum required withdrawal rate is high, there would be no withholding tax if you don't take out more than required.
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Post by kcowan »

In addition to the OAS clawback, there is also the Age Exemption clawback to be considered in tax planning for the next 7 years.

The RRIF withdrawal should be scheduled for December once it becomes mandatory. Then you have all year to make sure there is enough cash available, plus any gains during the year are protected. Then you can add it to the Fixed Income ladder that feeds her bank account for living expenses.
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Post by Bylo Selhi »

kcowan wrote:The RRIF withdrawal should be scheduled for December once it becomes mandatory. Then you have all year to make sure there is enough cash available, plus any gains during the year are protected. Then you can add it to the Fixed Income ladder that feeds her bank account for living expenses.
At BNS, at least, it doesn't matter how your GIC ladder is structured or when the rungs mature. On the anniversary of the date you designate they'll redeem just enough of the lowest interest rate GIC(s) — regardless of maturity date — to fulfill your minimum annual withdrawal requirement. There's no charge or interest penalty for this so you can just keep rolling GICs as they mature.

Do the other banks provide similar flexibility?
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Post by kcowan »

Bylo Selhi wrote:Do the other banks provide similar flexibility?
In my case I keep MIL in bonds and there are always some that mature in December. But they have minimum purchase quantities so I guess I need to switch to GICs as the amount dwindles away (she is almost 92).
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Post by Bylo Selhi »

I should also have pointed out that
(a) the GICs are all from BNS-owned issuers (ScotiaBank, ScotiaMortgage, Montreal Trust, National Bank, etc.) and
(b) we have a good relationship with the local BNS branch so they'll generally match the best GIC rates we can show them from a competitor. [Thank you Norbert for this. It makes my work sooooo much easier :twisted:]
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Post by twa2w »

At BNS, at least, it doesn't matter how your GIC ladder is structured or when the rungs mature. On the anniversary of the date you designate they'll redeem just enough of the lowest interest rate GIC(s) — regardless of maturity date — to fulfill your minimum annual withdrawal requirement. There's no charge or interest penalty for this so you can just keep rolling GICs as they mature.

Do the other banks provide similar flexibility?
Yes but it only applies to Bank held RSPs. It does not usually extend to their discount broker or full service arm. Although in at least one bank it does at the discount broker with their own GIC's.
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RRSP to RRIF

Post by izzy »

When converting my RRSP to a RRIF I have the option of using my younger spouses age when calculating minimum withdrawals.What happens if my spouse should predecease me?Does the withdrawal formula continue as if he/she was still alive or does it revert to a calculation based on my own age? and if the former and I inherit my spouses RRSP/RRIF can it be rolled into my RRIF and withdrawals continue to be based on my deceased spouses age were he/she still alive?
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Post by twa2w »

What happens if my spouse should predecease me?Does the withdrawal formula continue as if he/she was still alive
Yes,
and if the former and I inherit my spouses RRSP/RRIF can it be rolled into my RRIF and withdrawals continue to be based on my deceased spouses age were he/she still alive?


yes - the money rolls into your plan and withdrawals on your plan continue on the basis your plan was set up under.

A RIF can be set up with a beneficiary in which case the funds can be rolled over into your RIF, ( your wife estate would be responsible for the minimum annual payment in year of death ) or it can be set up with a survivor annuitant in which case the RIF remains as is and you become the annuitant or recipient of the payments with no change in set up. Your wifes estate is only responsible for payments made to date of death and you would be responsible for payments after that date.

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Post by izzy »

twa2w wrote:
What happens if my spouse should predecease me?Does the withdrawal formula continue as if he/she was still alive
Yes,
and if the former and I inherit my spouses RRSP/RRIF can it be rolled into my RRIF and withdrawals continue to be based on my deceased spouses age were he/she still alive?


yes - the money rolls into your plan and withdrawals on your plan continue on the basis your plan was set up under.

A RIF can be set up with a beneficiary in which case the funds can be rolled over into your RIF, ( your wife estate would be responsible for the minimum annual payment in year of death ) or it can be set up with a survivor annuitant in which case the RIF remains as is and you become the annuitant or recipient of the payments with no change in set up. Your wifes estate is only responsible for payments made to date of death and you would be responsible for payments after that date.

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So it would appear that if your financial situation is such that the maximum deferral of your RRIF would be beneficial (e.g. for estate maximisation where there are other funds available for your living expenses) and if you have a younger spouse this may be another reason to set up a small RRIF using your spouses age in the formula when you turn 65,as well as being a way of qualifying for the pension credit.Obviously nobody would wish to be in a position to benefit in this way from doing so though.
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Post by treetops »

Somewhat related....

My mother (92) has a RIF , the income of which she does not need. We have been taking minimum withdrawals for a number of years, but I'm concerned that the principal is not being worked down very quickly.

I am the beneficiary and POA. How would this balance be treated upon her death? Her tax or mine? Are there mechanisms to lessen the tax burden if the RIF was collapsed now?

Thanks.

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Post by kcowan »

If you are the named beneficiary, then you will carry the full hit from the taxation. What you might want to do is have her draw down as much as she can without compromising her other tax advantages.

My MIL just died this year (at 92) and I have been through the "woulda should coulda" cycle. OTOH we decided to make her comfortable and not make her life seem complicated.

Money somehow seems secondary when you are losing someone so special.
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Post by treetops »

Thanks, Keith.

As you indicate, we may have an opportunity to increase the draw-down with little/no tax hit.

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