RRSP (Canadian) withdrawal process and options

[YVRRocketSurgery]

I'm trying to map out my RRSP withdrawals and was hoping to gets some feedback on the process and options.

My target for retirement is in a few years at around age 50/51. I have a chunk of money in my RRSP which I'm planning to draw down slowly on a yearly basis to $0 roughly by the time I reach 71 to limit impact of the mandatory conversion to RRIF and minimum withdrawals.

Should I just withdraw money from my RRSP account directly and obviously take the tax hit and withholding tax. While I hope to somewhat lessen the impact of the withholding tax by withdrawing at the end of the year so I can get it back in a few months when I file my return, it's not really a major concern for me as my other investment income streams should cover my spend.
Or is there any value in migrating some or all of the RRSP money to a RRIF and withdraw from the RRIF?

My understanding is that I'm not eligible for the $2k pension credit, which I'm hoping to apply to RRIF withdrawals, until age 65. So I'm assuming there's no value in converting if even just parts of the RRSP to a RRIF until 65.

Thoughts?

 

[Sittinginthesun]

Try posting your question on this Canadian site Financial Wisdom Forum - Index page

 

[6miths]

Good question. It will be interesting to see what strategies are suggested by Canadian members of the forum. My suggestion would be to go over to the Financial Wisdom Forum and pose your question there after searching to look to see what previous threads exist on the topic (it comes up frequently). There is a member there named 'steves' who has a handy software package called RRIFmetic (you could search that on the forum as well). He has run simulations for many members in the past although I don't know if he still does this. Often, it seems to me that the loss of the benefits of tax deferred growth outweighs the the benefits of drawing down the RRSP. Of course, if you need the money that is another matter.

At 55, and retired for 3 years, we are letting our RRSPs ride and in fact have continued to make contributions although we may be getting to that point of them being 'too big' which seems a great problem to have. When we eventually have some down income years, we may decide to withdraw some money from the plans but we will have to look at the numbers at the time. In the meantime, the market could of course 'help' with the minimum withdrawal problem at anytime.

 

[6miths]

Try posting your question on this Canadian site Financial Wisdom Forum - Index page

Doh!!

(I have to learn to type more quickly - perhaps an effect of aging?)

 

[Viking]

You are correct that RRSP and RRIF withdrawals do not qualify for the pension income deduction until age 65.

Lump sum withdrawals from RRSPs have withholding tax of 10% up to $5k, 20% on the next $10k, and 30% on amounts over $15k.

There is no withholding tax on withdrawals from an RRIF IF you withdraw only the minimum amount. More than the minimum defaults to the RRSP lump sum withdrawal withholding tax scheme.

So there may be an advantage to rolling the RRSP into a RRIF if you will withdraw only the minimum amount. Never hurts to confirm this with your broker/financial institution.

 

[Meadbh]

I can help, because, having ERd at 55, I am employing this strategy. If I leave my RRSPs alone to accumulate till age 71, I will immediately be catapulted into the top tax bracket and will have all my OAS clawed back, which is effectively equivalent to an additional 15% tax. My goal is to smooth out my tax payments in the meantime. An additional side effect of withdrawing from RRSPs, since my RRSPs are heavily weighted towards fixed income, is to automatically rebalance in favour of equities in my portfolio as a whole. Recent work by Pfau et al suggests that an equity glide path (upwards) in retirement may contribute to improved portfolio sustainability. So I could kill two birds with one stone, so to speak.

I agree with the suggestion to check out RRIFmetric. Steve also posts on the Canadian Money Forum as steve41. He has run scenarios there too and he did one for me a few years ago. I think the NPV was very slightly in favour of letting the RRSP alone. Some years ago I tried out the demo version of RRIFmetric. It is designed for Canadians and it was useful for scenario building, but was clunky. However, it requires a Windows environment, and since I now use a Mac, I did not purchase the full version and no longer have access to the program.

There are voluminous threads on this subject at both the FWF and CMF. I strongly recommend reading them. Taxtips.ca is also a great reference site.

Making the decision to withdraw early from RRSPs is a very individual one. Consider estate planning (your entire remaining RRSP is deemed to have been disposed of when you die and will be taxed as income of your estate, unless a spouse or dependent child is the beneficiary) and the same applies if you leave Canada.

As for the logistics, most financial institutions will charge a small fee to withdraw from an RRSP, but there is usually no fee to set up and administer a RRIF. Further, the pension tax credit that you can use from age 65 onwards requires that you have a pension plan, meaning an RRIF, as opposed to a sporadic withdrawal from an RRSP. The pension tax credit only requires that you withdraw $2000 per year.

I hope that's helpful!

Meadbh

 

[Meadbh]

Try posting your question on this Canadian site Financial Wisdom Forum - Index page

We have Canadian members on this forum too.

 

[YVRRocketSurgery]

I appreciate the feedback and website/tool suggestions. Haven't come across FWF and RRIFmetric yet but will check them out.
I do visit taxtips.ca and use their tax calculator to run some some scenarios.

Trying to limit OAS clawback in my forecasts is also a goal.

 

[kcowan]

Steve Salter, the author of RRIFmetic, lives on Saltspring Island. He will run a scenario eventually but it usually shows very little difference between alternate plans. The SW runs on XP but an FWF member has developed a workaround to use it on W10.

Because you have 20 years, you have lots of alternatives. When to take CPP (60+) and OAS (65+) and RRIF (anytime). The minimum withdrawal at age 50 is pretty small (1/(90-age)) and so will not be melted down in 20 years. OTOH it will probably get reduced enough to have minimal impact on OAS.

 

[Koogie]

Steve Salter, the author of RRIFmetic, lives on Saltspring Island.

{puts on pedant hat}

His signature says Hornby Island.

{takes off pedant hat}

that's it. nothing of any other use to add to the conversation...

 

[Meadbh]

Speaking of CPP.....

As you know you can start taking it anytime between 60 and 70. There is a 0.6% reduction in payments for every month before age 65 that you start.

https://retirehappy.ca/taking-cpp-early-the-new-breakeven-points/

Conversely, there is a greater increase if you delay taking it after age 65. The calculations can be complex.

https://retirehappy.ca/how-to-calculate-your-cpp-retirement-pension/

If your career has been short (as mine has) you will have too many years with no earnings. Only 17% of years can be eliminated from the calculation. Your Service Canada account will indicate that your "calculated retirement pension" will increase the longer you wait, but their calculations assume that you continue to earn "average" earnings till age 65. In reality, your monthly CPP payment may plateau or even decrease, as more of your earning years are dropped from the calculation. It may be advantageous to take CPP early, but don't make your decision on the Service Canada calculator results.

Doug Runchey is a retired federal pension officer who also posts on FWF and CMF forums. He will answer questions there, and will do detailed calculations through his consulting practice. FWIW, he lives in Comox.

DR Pensions Consulting - Canada Pension Plan Expertise

Disclaimer: I have no financial interest in any of the individuals whose links I have posted.

 

[YVRRocketSurgery]

I skimmed through and posted on the CPP thread on the CMF after you (Meadbh) recommended it in my previous decumulation thread.

Yes, I'm going to have too many zero contribution years.

I think Doug confirmed the following formula for a rough calculation of CPP benefit:
(My max contribution years)/(Number of years used for max monthly benefit) x (Max Benefit) x (Earlier Reduction Penalty) = Rough Monthly Benefit

I was kind of surprised that even with my additional zero contribution years, CPP would yield a higher benefit for me taken at 65 vs 60. Because of this, I've adjusted my forecasting to take CPP at 65. I also don't have a DB pension so having a higher indexed CPP is kind of nice. I'm on the fence delaying it even further to 65-70 for a higher payout as you get more into life expectancy ambiguity impact on maximizing your payout.

 

[Hyperborea]

It gets more complex if you've got CPP and US Social Security. For CPP, I've got about 8 years of low contribution (summers while in school and TA/RA) and 6 of reasonably high contribution. However, my SS will be pretty decent based off of almost 20 years of max contribution. However, SS will ding me for other pension money earned outside of the US system - probably taking 50 cents for every dollar received on other pensions. Given that my SS will be far higher than my CPP I think that I should take CPP as early as possible and hold off on my SS until as late as possible. That gives me the max SS as a fallback for portfolio issues and for my wife. It also gives me the minimum amount of overlap.

Is anybody else looking at overlap in the government plans?

 

[Meadbh]

I was kind of surprised that even with my additional zero contribution years, CPP would yield a higher benefit for me taken at 65 vs 60. Because of this, I've adjusted my forecasting to take CPP at 65. I also don't have a DB pension so having a higher indexed CPP is kind of nice. I'm on the fence delaying it even further to 65-70 for a higher payout as you get more into life expectancy ambiguity impact on maximizing your payout.

My numbers were similar. Absolute payments increased between 60 and 65, though the slope of the line was flatter than it would have been if I had fewer zero contribution years. The break even point between 60 and 61 was at 72 years, but each year had a different break even with the next. Then I looked at the average annual increase in current dollars between 60 and 65, and it turned out it was equivalent to about a 7% increase per year. So it may be worthwhile to wait till 65 after all, especially if I am using a RRIF to draw down RRSP funds early. It's like having a COLA annuity waiting for me. However, I am not willing to delay my gratification till 70!

 

[kcowan]

{puts on pedant hat}

His signature says Hornby Island.

{takes off pedant hat}

that's it. nothing of any other use to add to the conversation...

Yes he lived in West Vancouver and Hornby was his cottage until his breakup then she got the house and he moved to Hornby. It is 3 ferry rides away from West Van.

 

[GreatLaker]

I am not quite in RRSP or RRIF withdrawal mode, but very soon. I plan to make withdrawals late in the year, so the withholding tax will be netted out early the following year when I do my taxes.

Withdrawing from a RRSP vs. converting to a RRIF may depend on your broker. TD charges a partial de-registration fee of $25 from a RRSP, but RRIF withdrawals are free. So some people open a RRIF, transfer money in (no charge) and then withdraw from the RRIF (also no charge), leaving some funds in the RRIF so it does not have a $0 balance. $25 is a small saving, but it does buy a box of [-]cheap[/-] frugal beer.

Absent any concerns about OAS clawback, high taxation on a surviving spouse and estate planning, I think it would be more tax effective to withdraw from non-registered accounts first. Non-registered withdrawals are taxed at the capital gains rate, on capital gains only, compared to RRSP or RRIF withdrawals taxed at full marginal rate. Nonetheless, many people should make some withdrawals from registered accounts before age 71 to avoid OAS clawback and other tax optimization. I plan to withdraw a specified amount every year from retirement to age 71. One tactic is to withdraw enough to drive your income up just below the next tax bracket. (See TaxTips.ca - The Facts on Tax for Canadians for tax rates by province).

A good discussion on what accounts to withdraw from first is available here: http://www.rgafinancial.com/articles/What-Account-Should-I-Draw-From-First-In-Retirement.pdf The numbers in it are based on Alberta tax rates from a few years ago. The strategy he recommends is minimize overall taxes by withdrawing as much from RRSP as you want from retirement until OAS starts, then withdraw as much as you can while still minimizing or eliminating OAS clawback until age 72, when mandatory withdrawals start so by then you will have eliminated, or at least minimized OAS clawback.

Another good site if you have not seen it is Finki, the Canadian Financial Wiki, which is the companion site to Financial Wisdom Forum.

 

[Meadbh]

This book is worth a read too:

Your Retirement Income Blueprint

 

[kcowan]

I have a friend here in PV (normally The Beach) who is retired at 56. So he has all the levers available too him. Fortunately he is spreadsheet capable. One of the things that really misled him was the CPP statements. They assume he would be making is high executive salary for another 9 years. He had not appreciated that, and now that he is retired, he needs to drop out some low earning years rather than his current zero salary years. We got to that conclusion will lounging in his pool.

And we got into the discussion about how average Canadians could cope with all the variables facing them at early retirement. He also did not understand CRM2 and its implications.

Anyway taking money from his RRSP and paying tax on it so as to stay in a lower tax bracket has been his primary focus. But the CPP decision has many implications because of survivorship issues.

 

[brett]

I have the same challenge to a lesser extent. Took CPP early because it was advantageous given I just missed the new higher premium for taking it at 60 rules plus I did not have the full 37 or do max contribution years. What I am doing is postponing OAS for at least a year, probably two until I get a better handle on income and tax rates. We have a good problem...our PHN bond fund did incredibly well this year (35percent) and we are anticipating taking higher amounts into income in 2016 and 2017.

 

[Danmar]

Currently 66. I am planning to defer CPP till 70 as in good health and don't need the funds earlier. Collapsed my RSP couple years ago mostly just to simplify things. It wasn't material to my overall finances.