How Strategic RRSP or RRIF withdrawals could allow you to smooth out your income levels during retirement.
A Good Problem
Any good baseball manager will tell you that having too many good starting pitchers is a good problem. You always want good players on the field of course, but only one pitcher can stand on the mound at a time. It’s a good problem.
Having to choose between Harvard or Yale is a good problem, if you happen to be in the select group of students who have been invited to attend both.
Too many good job offers. Too many marriage proposals. Having to decide where to go on vacation. These are all examples of good problems.
Having a large investment account may not seem like a problem, but to many Canadians who are forced to take income every year, even when they don’t need it, can create a tax headache. Too much unwanted income can be a problem. Perhaps a good problem?
Melt Down Your RRSP or RRIF Early?
If you have a large RRSP or RRIF balance, you might want to consider taking bigger withdrawals from your plan earlier in retirement rather than limiting yourself to making only the mandated minimum withdrawals from your RRIF when you are forced to do so.
In Canada in 2023, the minimum withdrawal that you will be forced to take at age 72 is 5.28% of your account. And the minimum percentage goes up every year after that.
Taking your withdrawals strategically from your account early can allow you to smooth out your income levels over retirement, lowering your overall tax liability, not to mention managing access to your government senior’s benefits.
If you defer your withdrawals too long, you could end up with a good problem. But the problem part may be avoidable.
A well-meaning Canadian in the early years of retirement who decides to draw from their non-registered accounts and TFSAs to fund their lifestyle by not touching their RRSPs could very well go from a very modest tax bracket in the 60s to a much higher tax bracket in their 70s. There RRIF may have had another 10 or 15 years of tax-free growth.
There are certain cases where it makes sense to begin “melting down” your RRSP or RRIF early, depending on your situation.
As we have seen in many cases in this space, more Canadians are passing away with large RRSPs and RRIFs, which is of course the Government’s most favourite thing, because they get nearly half, and your chosen beneficiaries get the rest.
There could be a benefit to using early withdrawals from your RRSP or RRIF to fund the premiums on a permanent life insurance policy that would offset the CRA bill and create a tax-free benefit your beneficiaries. That is outsmarting the government!
Many Canadians are also choosing to delay retirement into their 70s. According to statistics from Finance Canada, the labour force participation for individuals 70 and over grew to 8% in 2022, up from 4.9% in 1978. Labour participation between ages 65 and 69 grew to a whopping 28.5%, which was up from 13.9%.
Many Canadians are working during their retirement. These folks with higher incomes may be concerned about losing access to government programs, such as the over-65 age amount and old age security, so they may not want to add to their incomes by drawing down their RRSPs or RRIFs early.
We are all aware of the OAS clawback, and many folks want to do everything they can to ensure that they are not “clawed back”. Every situation is different of course.
Will It Last?
On the other side of the coin is the fear of running out of money too fast. The fear of outliving your savings. That may not be such a good problem. Living longer would be great, but we want to make sure that there is money there too.
As you can see, there are many variables to consider regarding when to begin drawing income from your RRSP and RRIF, so make sure to talk to your advisor. Having a plan is always a good plan.
If you would like to discuss your own RRSP or RRIF drawdown strategy with me, please feel free to book a free 15-minute call here: FREE 15-MINUTES
As always, I look forward to hearing from you.
THIS ARTICLE IS PROVIDED AS A GENERAL SOURCE OF INFORMATION ONLY AND SHOULD NOT BE CONSIDERED TO BE PERSONAL INVESTMENT OR LEGAL ADVICE. READERS SHOULD CONSULT WITH THEIR FINANCIAL OR LEGAL ADVISOR TO ENSURE IT IS SUITABLE FOR THEIR CIRCUMSTANCES.