For high-earners who’ve watched a significant portion of their paycheques evaporate in taxes, the opportunity to drop to a lower tax bracket in retirement can be a thrill. But is it the best choice for your long-term plans, and the needs of your loved ones?
Last month, White Rock Senior Wealth Advisor Dave Lee explained his Total Wealth Plan for RRSP contributions. This month, he explains your options when it’s time to convert an RRSP into an RRIF (Registered Retirement Income Fund).
“For affluent individuals who don’t necessarily need the money in their RRSP for retirement living, the temptation is to enjoy the very low tax in the early years of retirement. But as the RRSP continues to grow, it creates a bigger future tax burden,” he says.
Canadians are required to convert their RRSP into an RRIF in the calendar year that they turn 71 and make their first withdrawal the following year. The minimum amount you must withdraw changes every year based on your age and the value in the account, but Dave says that some people may benefit from taking out more — even if they don’t need it.
Plan ahead to manage tax obligations
Managing RRIF withdrawals is a significant planning opportunity, and an experienced advisor can help make decisions to benefit your retirement, as well as the security of your spouse and the wellbeing of your beneficiaries.
“It’s a bit of a balancing act. It’s important to look at RRIFs in the context of the Total Wealth Plan, and to revisit it every year to refine your plan,” Dave says.
- Individuals with a significant amount remaining in their RRIF at the time of death may be taxed at 53.5 per cent in BC. Withdrawing more money earlier (at a lower tax rate) may result in more of your savings reaching your beneficiaries.
- RRIFs can be rolled over to the surviving spouse with tax deferred until the surviving spouse withdraws funds.
- Couples can split RRIF income, offering a tax advantage. Deferring withdrawals may result in the value of both RRIFs being taxed to the surviving spouse at a higher tax rate.
- Couples can also use the younger spouse’s age when calculating their minimum withdrawal limit, to offer more flexibility.
- When your net annual income exceeds the threshold ($81,761 for 2022), you have to repay part or all of your Old Age Security pension (sometimes referred to as OAS clawback). “Often when doing RRIF withdrawal calculations, we’ll raise the client’s annual taxable income up to (but not above) the OAS clawback threshold,” Dave says.
To discuss investments, life insurance, retirement planning, estate planning, generating income and minimizing your taxes, make an appointment with Dave Lee in White Rock. Call 604.535.4743 or email dave.lee@scotiawealth.com, and follow him on Facebook, Twitter and LinkedIn for more financial insights.
ScotiaMcLeod, a division of Scotia Capital Inc.
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