Maximizing your RRSP savings through consistent contributions can pave the way for a substantial retirement fund, potentially reaching six or seven figures. However, the challenge lies in withdrawing from your RRSP efficiently to minimize tax implications. While leaving funds untouched for tax-free growth is often recommended, personalized strategies should be considered to optimize your retirement income.
RRSPs serve to defer taxes from high-income periods to lower ones, fostering tax savings and enabling tax-free growth. By age 71, Canadians are mandated to convert their RRSPs to a RRIF or an annuity, necessitating minimum withdrawals. The minimum required withdrawal in the early years of the RRIF is in the 5.5% - 6.5% of asset range, but investors can draw any amount over that minimum. However, delaying withdrawals until this point may limit flexibility and inadvertently elevate tax brackets, particularly for those with significant RRSP holdings.
There is also an estate consideration with your RRSP / RRIF accounts. For couples, the rules are that if one spouse dies the assets of the RRSP / RRIF can transfer to the surviving spouse tax free. Upon the death of the second spouse the RRSP / RRIF is deemed to have been withdrawn in its entirety. If there is a large balance in the RRSP / RRIF this balance would be taxed at a very high tax level to the estate.
Delays in withdrawing RRSP funds can lead to unintended consequences, including higher taxes and adverse effects on tax credits like the Age Amount non-refundable credit ($7,635 for 2021) and the Pension Income credit ($2,000 for 2021). These credits may diminish due to mandatory RRIF minimums at age 71, affecting tax brackets and OAS claw backs, which intensify as the minimum withdrawal rates increase with age.
One downside to withdrawing from a RRSP or RRIF is that you may lose many potential years of tax-free compounding savings. While there would be some tax on the withdrawal, the net proceeds could be reassigned to TFSA accounts. In 2023 the lifetime TFSA contribution limit was $88,000 per person. 2024 annual contribution amount increases to $7000 per person. TFSA accounts can pass from one spouse to another on the death of the first spouse and, unlike RRIF accounts, assets in the TFSA upon the death of the second spouse pass to the estate tax free.
Annuities come in a variety of different forms, but the basic description is that they are an insurance product that provides a fixed payment and predictable returns. Once the annuity is purchased the terms and payments do not change, there is no potential for further growth as in equity investing. Factors contributing to the size of your annual payment include your age, your sex, when you purchase the annuity, interest rates and whether you wish to add some guaranteed payment options.
A Joint & Last Survivor annuity makes payments until the death of the second spouse. The payments can continue in full to the surviving spouse or may be reduced at death of the first spouse. Annual payments for continued in full option are lower than if payments are reduced at first death. This sort of annuity also provides for a guaranteed payment option. If death of the second spouse occurs before the guaranteed period, the beneficiaries of the estate receive payment.
It is always wise to consult a financial advisor before initiating RRIF payments. You may also wish to get an opinion from your accountant on an early draw down strategy. Discuss RRIF minimums, secondary incomes' impact on tax brackets, and optimal CPP/OAS initiation with your advisor. Ensure tax efficiency across all income sources to maximize the benefits of your hard-earned retirement savings.
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All material has been prepared by McKenzie Wealth. McKenzie Wealth is an investment advisor team or Investment Advisor at Richardson Wealth Limited. The opinions expressed in this blog/ video are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson Wealth or its affiliates. Richardson Wealth Limited, Member Canadian Investor Protection Fund. Richardson Wealth is a trademark of James Richardson & Sons, Limited used under license.