Author Topic: Reducing overall taxes in retirement and implications of a high RRIF balance.  (Read 1033 times)

bluebelle

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Has anyone ever come across a calculator that considers overall tax paid and factors OAS claw-back implications due to RRIF minimum withdrawals?  Every financial plan I've ever seen always draws down non RRIF funds first, without considering the implications of minimum RRIF withdrawals on a million dollar RRIF, the argument being "it's better to shelter funds as long as possible".

I'm happy that some of the talking heads have finally come around to my way of thinking (so they must be right).  Some 'experts' are now saying that if you're retiring 'early' with both registered and non registered accounts, to consider drawing down your RRSP (and converting a portion to a RRIF at 65 to get the pension credit).  I think this makes alot of sense for folks with large enough RRSP balances that the RRIF minimum withdrawal limits would exceed income requirements and push folks into a higher tax bracket and possibly OAS claw-back territory.  This will be especially true after the death of a spouse, when the RRIF balances combine and the living spouse has an even bigger balance.

Our plan is to retire at 56/55 (earliest date for a reduced defined benefit pension for hubby).  I'm currently in the second highest income tax bracket, so RRSP contributions make sense (although we're only a few years out from retirement, so this is a moot point).  I expect we'll each be in the lowest bracket in retirement (may just squeak into the next one but probably not).  My plan is to pull some monies out of RRSPs rather than depleting the non registered accounts first.   I'm pretty handy with a spreadsheet and could probably build one that would let me test out various scenarios, but if anyone has such a thing or has come across a calculator, I'd love to see it.

Situation:
- retiring in 3 years or slightly less
- hubby has a defined benefit pension (not huge, buy hey, it's indexed)
- TFSA
- non-registered accounts
- we each have RRSP

Plan:
- live off pension and a combination of registered and non-registered accounts

Goal:
- Pay the least over-all taxes over our retired lives
- avoid OAS claw-back for as long as possible (I fully 'get' that this is a wonderful problem to have - enough retirement funds that I'm even thinking about it)

PS - long time lurker, first time poster.  I love that I have somewhere to post this stuff - it's not something I can discuss with folks in real life, money being such a taboo in our society.

Mr. Rich Moose

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Posting to follow as I haven't found a calculator like this myself.

I have manually used the TaxTips calculators for my personal situation and ran many different scenarios based on that. I tried to keep individual income for each partner well under the OAS clawback rate of $73,000. Not difficult when our spending is in the $50,000 range including rent.
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KMMK

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Professionally I use http://razorplan.com/ . I think it can probably do calculations like that. (Just haven't need that function yet for my clients.) You could get the free trial and play around with it.
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Goldielocks

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Posting to follow as I haven't found a calculator like this myself.

I have manually used the TaxTips calculators for my personal situation and ran many different scenarios based on that. I tried to keep individual income for each partner well under the OAS clawback rate of $73,000. Not difficult when our spending is in the $50,000 range including rent.
I was going to say something similar.   I think they keep to the old saw that you keep funds registered as long as possible because so few people have $73k x 2 people = $146k in income during retirement.

I have seen calculations involving GIS calculations, and I saw one person need to be careful because they were a single person, over 75 years old, and their RRIF had grown quite large.

I think the goal is to deflate your RRSP by drawing it down in lower tax years as much as possible, topping off with taxable investments then TFSA's for a while.  (or better yet, use TFSA to fund the new car or luxury cruise, if that is your thing, without spiking your income).

bluebelle

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I agree, that for the general population, mandatory RRIF withdrawal amounts will not be an issue, since too few Canadians are taking advantage of RRSP contributions and even fewer make the max contribution every year.  Thankfully folks on this forum are not your average Canadian! 

It saddens me that most financial plans advocate the draw-down of non-registered funds and TFSA before touching a penny of RRIF funds.   Since most folks follow the 'expert' advice, they end up being hit with a larger than necessary tax bill around the time they hit 80, or with the death of their spouse when the two RRIFs merge.   Too many people look at the short term 'tax savings' (which is really tax deferral), and delay drawing down their RRIF and don't look at the long game and what the over-all tax hit will be down the road......Our government is always looking for more not less tax revenue, there are not going to be more tax cuts for retirees as we live longer our population ages.




Step37

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Professionally I use http://razorplan.com/ . I think it can probably do calculations like that. (Just haven't need that function yet for my clients.) You could get the free trial and play around with it.

Thanks for this, KMMK. Iím going to have a play with it.
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Oatmeal Stout

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I like this Pension Credit at age 65 you mention. Convert a small amount of your RSP to a RIF (such as $12000) to get the $2000 credit each year.

It seems you can get the credit at age 55,  but it looks like you have to convert to an annuity (not sure I would want to do that).

I'm assuming this info I found is up to date:

"For those under 65 (for the whole tax year) eligible income includes:
 - Life annuity payments from a pension plan (including the Saskatchewan Pension Plan) or superannuation plan.
 - Payments from a registered retirement income fund, pooled registered pension plan or defined contribution pension plan received as the result of a spouseís or common-law partnerís death.
 - Annuity payments from a registered retirement savings plan or deferred profit sharing plan received as the result of a spouseís or common-law partnerís death."


"The Pension Income Tax credit is available to you if you are 55 years of age or older. "

"Transfer Locked-in Retirement Account (LIRA) assets to a Life Income Fund (LIF) and then annuitize. In most cases, you can transfer your LIRA to a LIF or LRIF once you reach the age of 55. To make the most of this strategy, you must transfer the LIRA to the LIF and then to an annuity in order for the income to be reported as eligible pension income. If you purchase the annuity directly from the LIRA, the annuity is considered a RRSP annuity, which only qualifies for the pension income credit after age 65."

bluebelle

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I know the tax credit isn't significant, $300 or so in tax savings, but it's worth the effort.....but it does 'bug' me that hubby's defined benefit pension automatically qualifies at age 55, where my RRIF withdrawals don't qualify until age 65.  But from what I've read, we can 'income split' just enough of his pension to allow me to get the tax credit under age 65.  Which works for us, since I underestimated what his pension payments would be, and built up his RRSP too much.

Few people have DB pensions now, and not everyone has a LIRA.  So while I can get the pension credit at 55, it seems very unfair to someone that worked hard and saved their pennies doesn't qualify until age 65, if all they have is RRSPs and non registered savings.  I realize this isn't the only flaw in our tax system, but just another one......

Goldielocks

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I know the tax credit isn't significant, $300 or so in tax savings, but it's worth the effort.....but it does 'bug' me that hubby's defined benefit pension automatically qualifies at age 55, where my RRIF withdrawals don't qualify until age 65.  But from what I've read, we can 'income split' just enough of his pension to allow me to get the tax credit under age 65.  Which works for us, since I underestimated what his pension payments would be, and built up his RRSP too much.

Few people have DB pensions now, and not everyone has a LIRA.  So while I can get the pension credit at 55, it seems very unfair to someone that worked hard and saved their pennies doesn't qualify until age 65, if all they have is RRSPs and non registered savings.  I realize this isn't the only flaw in our tax system, but just another one......

Well,  you could take CPP at age 60 and that counts...

Oatmeal Stout

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Well,  you could take CPP at age 60 and that counts...

ha ha I'm sure people try...but apparently:



Itís also important to know what doesnít qualify for the pension income amount:

1)      Old Age Security benefits

2)      Canada Pension Plan benefits

3)      Quebec Pension Plan benefits

4)      Death benefits

5)      RCA payments

6)      Benefits from Salary Deferral Arrangements

7)      Income from a U.S. Individual Retirement Account (IRA)

Goldielocks

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Well,  you could take CPP at age 60 and that counts...

ha ha I'm sure people try...but apparently:



Itís also important to know what doesnít qualify for the pension income amount:

1)      Old Age Security benefits

2)      Canada Pension Plan benefits

3)      Quebec Pension Plan benefits

4)      Death benefits

5)      RCA payments

6)      Benefits from Salary Deferral Arrangements

7)      Income from a U.S. Individual Retirement Account (IRA)

ooo.  my memory is rusty, it appears.   I knew about the rest, but thought CPP / QPP were still Aok..  I need to look it up again.

ETA:  Yep there it is..
 When I was sorting this out a couple of years ago, I think my plan was the LIRA - LIF - Annuity (depending on annuity rates) for $2k as soon as I could, because $2k/yr is not a lot of money to lock into an annuity, costing less than $70k to buy the annuity, and possibly a lot less if interest rates go up in the next 10 years before I am eligible.

OR just wait because 10 years x 30% marginal tax x $2k = $7k lost in taxes total, and that is an aggressive tax rate, it will likely be less. 

OR realizing that my taking a <very> part time job in FIRE with a defined benefit pension plan will hopefully pay out if I keep it up for 6 more years so that it becomes vested.   (I work only 280 hours a year at it... which is why it takes so long to vest).
« Last Edit: October 30, 2017, 02:11:28 PM by Goldielocks »

Acadian

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I find myself in a situation with some similarities to yours (DB available at 55, RRSP withdrawal could change tax bracket).

An idea that I have been tinkering with is retiring at 55 but delaying pension until 60 (at 55 DB is available but reduced, at 60 no penalties):
1) Quit my job at 55
2) Delay pension start until 60
3) Withdraw as much RRSP from 55 to 60 as possible (while still keeping tax bracket low).

You wouldn't have to even spend all the RRSP withdrawals just get it out so it's taxed but at low rate.

Would something like that work in your situation? (Of course, I'm no expert so maybe haven't considered all aspects of this kind of strategy).

Kimera757

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Well,  you could take CPP at age 60 and that counts...

No it doesn't. Only line 115 (pensions, annuities and RIFs at age 65 and over) count.