Timing the withdrawal of RRSP savings to minimize your tax hit

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Q. I’ve been fully retired since 2018, and living only on government pension (QPP, OAS and GIS). I have some RRSP and TFSA investments, and would like some help with determining when I should start withdrawing funds—and whether I will need to pay tax. I’ll be turning 71 in December 2021.

From whom do I seek out advice on this—my financial advisor, where I have my investments, or an accountant? And when would be the best time to seek it?
–Ellen

A. I hear your concern, Ellen. You’ve done the right thing, wanting to be independent in retirement by making investments inside your RRSP, but now you’re facing taxable withdrawals and a reduction in your Guaranteed Income Supplement (GIS) benefit.

You’re asking who you should seek advice from and, in this case, going to your financial planner first may be best. They will assess your situation and refer you to an accountant if needed.

Even before you go to your financial planner, though, I want to help you brush up on your knowledge of RRIF withdrawals and the GIS.

Any time during the year you turn 71, you have to convert your RRSP to a RRIF, and it is not until the year you turn 72 that you have to draw money from your RRIF.

Money drawn from your RRIF is considered taxable income and may reduce your GIS. This is unlike money drawn from your TFSA, which is not considered taxable income and does not reduce your GIS.

Here are two tools that will really help you understand the implications of RRIF withdrawals on your GIS:

(Note the RRIF calculator I selected is for ease of use only, there are many other similar calculators available online.)

Start by following this GIS table link, scroll to the bottom of the page, select the table that applies to you, and find your GIS eligibility amount.

Here is an example for you to follow, assuming you are single and have a CPP income of $8,000. For the purposes of GIS eligibility OAS and GIS income is not included.

Select “table number one” for a single person.
Scroll down and select the income range of $7,872 – $8,159.
Another table opens, select $8,000 – $8,015.
You’ll see your GIS is $458 per month, and combined GIS/OAS (Old Age Security) $1,071 per month.

With this information, now you can figure out how your RRIF withdrawals will affect your GIS.

Click on this link to open a RRIF calculator and fill in the appropriate fields.

Here is an example to follow, assuming you have $100,000 in a RRIF, starting minimum withdrawals Jan. 1, 2022. The minimum withdrawal amount is $440 a month or $5,280 annually from your RRIF.

Now go back to the GIS tables and add your RRIF income of $5,280 to your CPP income of $8,000 for a total GIS eligibility income of $13,280. Looking up your GIS benefit, you will see it has dropped to $221 a month for a reduction of $237 a month.

In this example, drawing $440 a month from your RRSP means a reduction in your GIS by $237 a month.

What can you do about this? There may be nothing you can do—but this is what you will talk to your planner about.

In some cases, it makes sense to draw everything from your RRIF over a year or two. This means higher taxes in those years and the loss of GIS, but going forward you will have a higher GIS.

You may hear that you should have withdrawn all of your RRSPs before you turned 65, or retired, or that you should have saved in TFSA instead of RRSPs. Maybe, but you were working and may have needed the tax deductions; plus, TFSAs weren’t available until 2009 and RRSPs may have been the best option at the time.

I hope this helps, Ellen, and I would suggest seeing your planner or accountant sooner rather than later. When it comes to tax planning, it is useful to anticipate upcoming taxable events and make small adjustments, if possible, ahead of time.

Allan Norman is a Certified Financial Planner with Atlantis Financial Inc. and can be reached at www.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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Comments Cancel reply

James Hamilton says:

September 14, 2020 at 11:49 am

Please advise if the “annual income” refers to gross income or, “net income” which is taxable by CRA.

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J Moore says:

September 14, 2020 at 11:50 am

There is an error in the text above. After the RRIF minimum amount is calculated, the text says: “Now go back to the GIC tables”. This should read GIS tables. The link is correct.

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1. Samuel Kavanagh says:
  
  September 14, 2020 at 3:57 pm
  
  Response from the MoneySense editorial team:
  
  Hello J, thanks for letting us know. We will update this as soon as we can. Our goal is to have the most up-to-date information. We do our best to fact check all our content before it gets published and make updates regularly, but some things may get missed. We would like
  to remind our readers to do their own fact checking before making any personal finance decisions.
  
  Reply
John Campbell says:

September 14, 2020 at 12:55 pm

For those ineligible for GIS but who must now withdraw from a RRIF, the challenge becomes how to time those withdrawals and pay as little income tax as possible. Beginning at 72 we must withdraw about 5% of the RRIF value each year increasing to about 20% when/if we reach 90. But this is a minimum and we are allowed to withdraw more.

How to minimize the total income tax paid? If we and our spouse (if we are married), die with a substantial amount left in our RRIF, our estates will pay income tax at a high rate as the full amount is taxed as part of that year’s income. The trick is to withdraw as much money from the RRIF as is possible while paying as low an income tax rate as possible before we pass away. If this means receiving more income than necessary, $6,000 per person per year can still be put into a TFSA where it is not subject to taxes.

Current federal income tax rates allow about $47,500 per year of taxable income at a maximum rate of about 15% federal tax. Provincial rates in BC are about 5%. Given we are seniors, we receive tax credits of almost $20,000, reducing taxable income to about $27,500 – putting our tax bill at about $5,500. For a couple, this provides about $95,000 per year gross and $84,000 after taxes which is more than enough for many of us, especially if we have no debt to service – and the tax bill is low.

Our plan is to withdraw enough from our RRIF so that our taxable income is about $95,000 per year. This will be something more than the minimum withdrawal required and will hopefully significantly deplete our RRIF before we die. For us, it will also allow making our annual TFSA contributions and to continue building this account which will eventually be passed to our estates free of taxes.

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