Is Carol better off withdrawing all the money from her RRIF now?

Q. I am considering deregistering my Registered Retirement Income Fund (RRIF) of $89,000 and taking the tax hit for the 2019 tax year. Doing this would leave me eligible to maximize the Guaranteed Income Supplement (GIS) as well as the Shelter Aid for Elderly Renters (SAFER) in the future.

Right now, I am 73 years old, and my income includes Old Age Security (OAS) and Canada Pension Plan (CPP) at a combined total of $622 per month; a small company pension of $228 per month; and a RRIF payment of $500 per month; for a total of $1,350 a month. Funds from deregistering the RRIF would be used to top up my TFSA, pay medical bills, as well as to pay off a bit of personal debt. I currently also receive GIS benefits of $400 a month, and SAFER benefits of $179 a month. Am I doing the right thing to make the most of my retirement money? Your comments on this strategy would be appreciated.
–Carol

A. Hi Carol, I believe you may be correct in that it makes sense to:

• withdraw all of the funds from your RRIF account;
• forgo your GIS and SAFER income for one year;
• deposit your after-tax RRIF proceeds into your TFSA; and
• maximize your future GIS and SAFER benefits.

Promise me, though, that you won’t do anything until you talk to a planner who can verify your numbers. In the meantime, to help you consider your options, I have made some assumptions about you and your situation, and you can view a simulation of what those financial changes would look like here.

Your RRIF withdrawals are affecting your GIS. Ideally, this is something to recognize around age 60, which gives time to develop a solution.

The Guaranteed Income Supplement is based on your last year’s taxable income, not including your OAS income. You can use the GIS tables (find them by scrolling about halfway down the page in the link) to estimate the income you may receive.

Any income from a RRIF is considered taxable income, while income from a TFSA is not taxable income. TFSA withdrawals have no impact on GIS or any other government credits or benefits, such as SAFER, again because it is not counted as taxable income.

It is for this reason many planners suggest TFSA contributions instead of RRSP* contributions if there is a good chance someone will be eligible for the GIS and other benefits and credits when they turn age 65.

Carol, you are paying almost no income tax at all. When you draw all of your money out of your RRIF, that amount will be added to your annual income and you will pay about $23,000 in tax.  The additional income from your RRIF will mean you won’t qualify for the GIS or the SAFER program in the following year.

In the year after your RRIF withdrawal, you will no longer have $6,000 of taxable RRIF income. Instead, you will draw an equivalent, non-taxable amount from your TFSA. In the eyes of the Canada Revenue Agency (CRA) you will be $6,000 poorer—meaning, in the next year, your GIS could be about $3,000 per year larger and your SAFER benefits will be larger by about $1,900 per year, tax-free. That’s about an extra $4,000 a year in benefits!

Then, of course, the more money you have in benefits, the less you will have to draw from your TFSA*, meaning your TFSA money will last longer. As a matter of fact, if you keep your RRIF as it is now, you will deplete it by age 92, assuming a 5% average annual investment return. If you follow your strategy you will never deplete your investments.

The risk to be aware of is that once your money is in a TFSA (which allows tax-free withdrawals) you may be tempted to spend it more freely than if you left it in a RRIF.

I hope this helps, Carol. It is the SAFER program that really makes your proposed strategy work; but before you do anything, get confirmation from a planner. It is good that you are thinking about your finances and looking for opportunities to do better.

 Allan Norman is a Certified Financial Planner with Atlantis Financial Inc. and can be reached at atlantisfinancial.ca or [email protected]

This commentary is provided as a general source of information and is intended for Canadian residents only. Allan offers financial planning and insurance services through Atlantis Financial Inc.

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