“We’re set for life. Should we cash out an RRSP?”
The cost/benefit analysis of liquidating an RRSP can get complex fast. What matters more are your priorities.
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The cost/benefit analysis of liquidating an RRSP can get complex fast. What matters more are your priorities.
I enjoy reading all the articles you write and the advice you provide for so many people. I’ve decided to send you a question to see if you would provide an answer to a small dilemma I have with my RRSP.
A little background about the situation. My wife and I are retired and have income from two defined benefit pensions: $70,000 mine and $23,000 hers. We also have income from CPP (both), OAS (hers) and her RRIF. Total income gross of around $147,000. My issue is an RRSP I have with about $200,000 in it. I’m considering converting it to cash, as I don’t need the RRIF income it will provide at 71, and converting it would alleviate any issues should I pass before I reach 71. I’m aware that my OAS would be put on hold for a few years but as you’ve explained in some articles that would not be a bad thing. I’m 65 so if I don’t collect until 67 or 68 no big deal.
—Randy
What is the RRSP dilemma you see for yourself if you die before age 71, Randy? I’m not sure I see it. Your registered retirement savings plan (RRSP) will transfer to your wife with no tax implications. Your Old Age Security (OAS) will stop with nothing going to your wife. Your CPP survivor benefits will help bring her Canadian Pension Plan (CPP) up to the maximum pension, available to her at 65, but no more along with a $2,500 CPP death benefit, and she may get 60% of your defined benefit (DB) pension. Probably your wife’s biggest financial hit may be becoming single and ineligible for splitting pension income leading to a reduction in tax credits and benefits, like OAS. But all those things will happen if you die before or after age 71.
Are you thinking you’d like to withdraw everything from your RRSP before starting your OAS or age 70? This way, if you die after age 70, there’s no RRSP/RRIF to transfer to your wife, no resulting income increase for her, and therefore no OAS clawback. This sounds like a good idea; let’s play it out and see. Start by converting your RRSP to a RRIF (registered retirement income fund) so you can split your pension income with your wife; you cannot split RRSP withdrawals.
To deplete your RRIF of $200,000 plus investment growth within five years, draw out about $45,000 a year and, at the same time, delay your OAS pension until age 70. The OAS pension increases by 0.6% per month for every month you delay beyond age 65 and if you delay until age 70 it will increase by 36%, guaranteed, and it is an indexed pension that will last a lifetime under current legislation.
What may have been a little better is delaying your CPP as it increases by 0.7%/month and the initial pension amount is based off the YMPE (yearly maximum pensionable earnings) which has historically increased faster than the rate of inflation, meaning that by delaying CPP to age 70 it may increase by more than 42%.
With your RRIF depleted, your wife will not experience an OAS clawback if you die before she does. Mission accomplished, but we should question the strategy. What are you going to do with the money you take out of your RRIF and how much money will you have after tax?
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I estimate that, in Ontario, your $45,000 after-tax RRIF withdrawal will leave you with $28,451 to invest. So, rather than having $45,000 growing and compounding tax sheltered you will have $28,451 growing and compounding. Ideally, if you have the room, you will invest this money in a tax-free savings account (TFSA), where it will also be tax sheltered, otherwise, you will invest in a non-registered account. A non-registered account means paying tax on interest, dividends and/or capital gains as they are earned, probate and no pension income splitting.
I should acknowledge that, if your intention is to spend the RRSP and have fun that is a perfectly suitable strategy, especially when you know the income, you need is $147,000 per year and you have indexed pensions to support that income. The problem for me is it makes for a short article, so let’s continue the analysis.
What would happen if, instead of drawing everything from your RRIF, you drew just enough to supplement your OAS pension while delaying it to age 70? What if, at age 72, your RRIF remains at about $200,000 and the mandatory minimum withdrawal is $10,800. You could split that $10,800 with your wife and not be subject to OAS clawback. Of course, when you die the RRIF will transfer to your wife, who will no longer be able to pension split and her OAS pension will likely be impacted.
Randy, I think you can see there is no clear-cut winning strategy here. Either draw RRSP/RRIF early or leave it to grow. You may read about strategies involving income averaging or early RRIF withdrawals to minimize tax, but often I find these to be more smart-sounding strategies rather than winning strategies. There are so many variables to account for, the analysis must be done using sophisticated planning software in conjunction with your life plan.
I will also add, if it’s your intent to draw the RRSP money early and have fun spending, you’re not alone. I have a number of clients with good DB pensions and RRSPs with a similar amounts to yours. Their view is why not spend most of their RRSP money by the time they are aged 75. At that time, their company and government pensions, and possibly a home sale, will provide them the income they need for their later life. They are more interested in travel, life and creating memories than reducing tax, maximizing OAS and building a large estate.
Figure out what do you want—really want—and pick your strategy.
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Fantastic article; an easy read, charming, and helpful!!
Thank you very much!