obgyn65 said:
3. please can you let me know more about how you start ER by withdrawing from your RRSP early to minimize your mandatory minimum withdrawals later ? I don't understand.
No problem obgyn, I will attempt to explain. An RRSP (registered retirement savings plan) is similar to an IRA, but of course not all the rules & regulations are the same. Gains, income and dividends within the RRSP are all tax-sheltered. There are no restrictions on taking money out of an RRSP, except that whenever you do, it will be taxed as income at your marginal rate. Many people use their RRSP to put a downpayment on their first home but they must replace the money within a fixed time to avoid the taxes.
RRSPs work most effectively when you invest in them while you have a high personal income (when the amount invested will be tax deductible), defer withdrawals for many years, and take out money during retirement, when your income will be minimal and your marginal tax rate will be low. But what if your RRSP is too big? Once you reach 72, you must convert it to an RRIF (registered retirement income fund) or an annuity. The RRIF is more flexible, but in the first year, you must withdraw over 7%, with gradually increasing mandatory minimum withdrawals. Add that mandatory withdrawal to CPP (Canada Pension Plan) and OAS (Old Age Security) and you can find yourself back in a higher tax bracket, with OAS clawed back. You have still deferred taxes, and hopefully your money has grown, but perhaps there's is a better way to minimize taxes and preserve those government benefits.
Now let's suppose you ER at 55. There are 17 years till age 72, when you must begin to withdraw from the RRSP. 17 years of minimal income. During that time you could draw down on the RRSP to the extent that you can while staying in the lowest income tax bracket, topping up if need be with other investments. By the time you reach 72, the amount left in the RRSP is considerably less than it otherwise would have been. And mandatory withdrawals, being smaller, are thus less likely to generate a significant tax liability. Meanwhile, your taxable portfolio is larger than it would otherwise have been and can be tapped without tax consequences.
My understanding is that IRAs cannot be drawn down early in the same way, but please correct me if I'm wrong.
If people want more detail, there are extensive discussions and modeling of this issue over at the Financial Webring Forum, which has a Canadian focus. You have to join to read the forum. Also, I recommend Googling "your retirement income blueprint" by Darryl Diamond. He calls this strategy "topping up to bracket".
I hope that is helpful!
Meadbh