Author Topic: Canada - FIRE with RRSPs  (Read 7998 times)

Heckler

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Canada - FIRE with RRSPs
« on: November 05, 2016, 09:51:03 AM »
I hear so much here about back door roths, conversion ladders, etc, but not much about optimizing RE taxes from RRSP income.   Let's talk about the mechanics of RE in Canada using an RRSP.

My current financial plan involves saving $400k in each of our RRSPs and withdrawing 20k gross income each starting around age 50.  I realize income tax is due.  Maxed TFSAs will supplement, and likely some part time work.  No plans for a taxable account, as we've got lots of RSP contribution room to hit 400k each with the use of a spousal RRSP and two individual ones.

 With <40k income, the current BC/Fed tax rate is 23%.  Not a problem, it's in the plan.  Today, I don't pay 38% on the income I save in RRSP and Spousal.

At 71, the RRIF minimum withdrawals will be low enough to not worry because we've been spending the RRSP for 20 years already.

But...  On a RRSP withdrawal of cash from age 50-71, the withholding tax is 30% on the assumption it's not your only income. 

How to best plan for this?  Paying 30% up front to get a 7% tax refund hardly seems like a good idea.  Save up a Taxable account instead of RRSP but pay capital gains each year?  Transfer the whole or partial RRSP to an RRIF at age 50?




« Last Edit: November 05, 2016, 10:24:24 AM by Heckler »

Heckler

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Re: Canada - FIRE with RRSPs
« Reply #1 on: November 05, 2016, 10:19:11 AM »
And go!

Retire-Canada

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Re: Canada - FIRE with RRSPs
« Reply #2 on: November 05, 2016, 10:31:57 AM »
A few ideas:

- the withholding tax rate is 10% on $5K or less withdrawals depending on your institution they may not look at the aggregate for the year and if so you could pull out ~$3.3K/month at the 10% rate.
- you could split your RRSP up between a few institutions if needed to help make the plan above successful so no one institution would see the whole picture
- you could pull out the money at the end of Dec and file your tax return in Jan the next year to get the returned $$ as fast as possible

http://www.moneysense.ca/save/retirement/how-to-tap-your-rrsp/
« Last Edit: November 05, 2016, 10:52:24 AM by Retire-Canada »

daverobev

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Re: Canada - FIRE with RRSPs
« Reply #3 on: November 05, 2016, 11:29:48 AM »
I hear so much here about back door roths, conversion ladders, etc, but not much about optimizing RE taxes from RRSP income.   Let's talk about the mechanics of RE in Canada using an RRSP.

My current financial plan involves saving $400k in each of our RRSPs and withdrawing 20k gross income each starting around age 50.  I realize income tax is due.  Maxed TFSAs will supplement, and likely some part time work.  No plans for a taxable account, as we've got lots of RSP contribution room to hit 400k each with the use of a spousal RRSP and two individual ones.

 With <40k income, the current BC/Fed tax rate is 23%.  Not a problem, it's in the plan.  Today, I don't pay 38% on the income I save in RRSP and Spousal.

At 71, the RRIF minimum withdrawals will be low enough to not worry because we've been spending the RRSP for 20 years already.

But...  On a RRSP withdrawal of cash from age 50-71, the withholding tax is 30% on the assumption it's not your only income. 

How to best plan for this?  Paying 30% up front to get a 7% tax refund hardly seems like a good idea.  Save up a Taxable account instead of RRSP but pay capital gains each year?  Transfer the whole or partial RRSP to an RRIF at age 50?

Withdraw once a year, but keep a year's expenses in a HISA. Check partial deregistration costs (withdrawing from an RRSP = partial deregistration, AFAIK). Also, the withholding is based on how much you withdraw *in each withdrawal* not cumulatively over the year. So if there are no dereg fees, just withdraw $5000 every quarter.

Even when you're withdrawing, you'll want to be putting into your TFSA. Ideally you want your RRSP to not conflict with your CPP/OAS. I'm planning on running my RRSP down before I hit 65/67, after 50 (when children go).

K-ice

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Re: Canada - FIRE with RRSPs
« Reply #4 on: November 05, 2016, 02:44:49 PM »
I haven't done the math but know you would want reduce your RRSP before your TFSA in order to avoid OAS clawback.

Does anyone know, if you have a larger RRSP does it make sense to withdraw an extra $5500 every year in early retirement to fill up your TFSA?


Retire-Canada

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Re: Canada - FIRE with RRSPs
« Reply #5 on: November 05, 2016, 03:00:34 PM »
I haven't done the math but know you would want reduce your RRSP before your TFSA in order to avoid OAS clawback.

Does anyone know, if you have a larger RRSP does it make sense to withdraw an extra $5500 every year in early retirement to fill up your TFSA?

I plan to as long as the extra $5500 from my RRSP doesn't bump me into a higher tax bracket. It will be helpful to reduce my RRSP such that I don't get any OAS clawed back later on.

Heckler

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Re: Canada - FIRE with RRSPs
« Reply #6 on: November 05, 2016, 04:39:59 PM »
Is anyone here under 60 and using an RRIF for income yet? 

RidinTheAsama

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Re: Canada - FIRE with RRSPs
« Reply #7 on: November 07, 2016, 11:49:45 AM »
Posting to follow.
I'm still a decade or so away from FIRE but I've had questions like these swirling around my head anyway.  Glad to see a discussion happening on the topic.

Retire-Canada

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Re: Canada - FIRE with RRSPs
« Reply #8 on: November 07, 2016, 11:53:23 AM »
Is anyone here under 60 and using an RRIF for income yet?

Is there an advantage to RIFFing early vs. simply taking money out of your RRSP as needed prior to mandatory withdrawal age?

daverobev

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Re: Canada - FIRE with RRSPs
« Reply #9 on: November 07, 2016, 01:43:36 PM »
Is anyone here under 60 and using an RRIF for income yet?

Is there an advantage to RIFFing early vs. simply taking money out of your RRSP as needed prior to mandatory withdrawal age?

Partial de-registration fees.

Retire-Canada

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Re: Canada - FIRE with RRSPs
« Reply #10 on: November 07, 2016, 01:50:27 PM »
Partial de-registration fees.

At Questrade that is $50.

totoro

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Re: Canada - FIRE with RRSPs
« Reply #11 on: November 07, 2016, 02:32:42 PM »
>My current financial plan involves saving $400k in each of our RRSPs and withdrawing 20k gross income each starting around age 50.

Nothing wrong with the plan.  I don't see an issue with the withholding taxes - you a lot of it back so you just need a bridge to this the first year - perhaps from savings sheltered in TFSA?  Also, you've got the tax rate wrong I think though? Your average tax at 20k each is going to be 8.92% not 23%, so you'll each get a significant refund of $4200 or so - or am I missing something?

For us RSPs had a lower ROI than investing in real estate with after-tax savings and leverage. We also now have unused RSP contribution room to cover the capital gain when a rental is sold.  We have other income from real estate in retirement so RSP withdrawals are not key due to having our cost of living covered from other sources. 

The TFSA is way more useful for us.  I didn't like being forced to convert to a RRIF later with mandatory withdrawals as it could result in a greater overall tax rate depending on the other income we have. 

daverobev

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Re: Canada - FIRE with RRSPs
« Reply #12 on: November 07, 2016, 05:21:08 PM »
Partial de-registration fees.

At Questrade that is $50.

Right; so you have a choice - withdraw $5k, have the lowest rate of tax withheld, but pay 1%; or withdraw more (perhaps once per year) and have more tax withheld, but pay relatively less to Questrade.

Or switch to an RRIF and not pay.

Retire-Canada

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Re: Canada - FIRE with RRSPs
« Reply #13 on: November 07, 2016, 05:34:48 PM »
Right; so you have a choice - withdraw $5k, have the lowest rate of tax withheld, but pay 1%; or withdraw more (perhaps once per year) and have more tax withheld, but pay relatively less to Questrade.

Or switch to an RRIF and not pay.

Looks like you don't avoid the withholding tax by using a RRIF: https://retirehappy.ca/new-rrif-withholding-tax-rules-may-mean/

daverobev

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Re: Canada - FIRE with RRSPs
« Reply #14 on: November 07, 2016, 08:01:06 PM »
Right; so you have a choice - withdraw $5k, have the lowest rate of tax withheld, but pay 1%; or withdraw more (perhaps once per year) and have more tax withheld, but pay relatively less to Questrade.

Or switch to an RRIF and not pay.

Looks like you don't avoid the withholding tax by using a RRIF: https://retirehappy.ca/new-rrif-withholding-tax-rules-may-mean/

Oh, interesting. Well, I'm not too upset about a bit of withholding - it just makes tax time unlikely to include a painful or unanticipated bill. And it is only on amounts over the minimum.

Heckler

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Re: Canada - FIRE with RRSPs
« Reply #15 on: November 07, 2016, 09:32:13 PM »
  Also, you've got the tax rate wrong I think though? Your average tax at 20k each is going to be 8.92% not 23%, so you'll each get a significant refund of $4200 or so - or am I missing something?



Provincial plus federal: 20% at 20k, 23% at 40k.  This is what I'm using for income tax rates (2015).  Am I wrong?

« Last Edit: November 07, 2016, 09:35:40 PM by Heckler »

Heckler

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Re: Canada - FIRE with RRSPs
« Reply #16 on: November 07, 2016, 09:39:01 PM »

Or switch to an RRIF and not pay.

Ahh!  Thats a good reason to switch the entire RRSP to RRIF at once if there are no deregistration fees on RRIF income.  My bank brokerage is $50 per deregistration. I was picturing that was every time I withdraw cash.
« Last Edit: November 07, 2016, 11:46:20 PM by Heckler »

SandyBoxx

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Re: Canada - FIRE with RRSPs
« Reply #17 on: November 07, 2016, 10:28:15 PM »
Following ( I hate using the "notify" button) :)

Heckler

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Re: Canada - FIRE with RRSPs
« Reply #18 on: November 07, 2016, 11:45:50 PM »

Or switch to an RRIF and not pay.

Ahh!  Thats a good reason to switch the entire RRSP to RRIF at once if there are no deregistration fees on RRIF income.  My bank is $50 per deregistration. I was picturing that was every time I withdraw cash.

But hang on...   Registered RIF...  As in pay to deregister funds from an RRIF.  Who on this great internet knows the truth?   Does a broker charge deregistration fees on each time you pull cash out of an RRSP or an RRIF?

okits

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Re: Canada - FIRE with RRSPs
« Reply #19 on: November 08, 2016, 12:01:26 AM »
  Also, you've got the tax rate wrong I think though? Your average tax at 20k each is going to be 8.92% not 23%, so you'll each get a significant refund of $4200 or so - or am I missing something?



Provincial plus federal: 20% at 20k, 23% at 40k.  This is what I'm using for income tax rates (2015).  Am I wrong?

Those are marginal rates.  You won't pay $4k in taxes on $20k in income.  Your overall tax rate will be much lower than the marginal rate (for instance, the basic personal exemption more or less shields the first $10-11k in income from tax, so already half your income is tax free).

To the main topic: I don't have a set amount I'm planning to deregister each year from my RRSP because there are a number of moving pieces.  Do I still have minor children (Canada Child Benefit is income tested) or am I eligible for other income-tested benefits?  What kind of eligible Canadian dividends do I have (in a low enough bracket you'll have negative income tax on these due to the dividend tax credit - the case in Ontario and possibly some other provinces) and has the government messed around with their taxation?  What are my other sources of income?

I would probably just deregister everything needed for the upcoming year in the second half of December and be prompt about filing my tax return.  If you get your tax refund in Apr/May it's soon enough that you won't have fallen short for living expenses for that year, yet.  And four months of giving an interest-free loan to the government isn't too bad (at least in our current, low-rate environment!)

daverobev

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Re: Canada - FIRE with RRSPs
« Reply #20 on: November 08, 2016, 07:29:57 AM »

Or switch to an RRIF and not pay.

Ahh!  Thats a good reason to switch the entire RRSP to RRIF at once if there are no deregistration fees on RRIF income.  My bank is $50 per deregistration. I was picturing that was every time I withdraw cash.

But hang on...   Registered RIF...  As in pay to deregister funds from an RRIF.  Who on this great internet knows the truth?   Does a broker charge deregistration fees on each time you pull cash out of an RRSP or an RRIF?

I don't think anyone charges dereg fees on a RRIF; you'd cry bloody murder, right? You're *supposed* to be taking it out! RRSP is different - you're supposed to be investing over the long term - so yeah, some places at least (Questrade I know, not sure about others but I'd assume most or all do) charge.

totoro

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Re: Canada - FIRE with RRSPs
« Reply #21 on: November 08, 2016, 10:02:25 AM »
  Also, you've got the tax rate wrong I think though? Your average tax at 20k each is going to be 8.92% not 23%, so you'll each get a significant refund of $4200 or so - or am I missing something?

Provincial plus federal: 20% at 20k, 23% at 40k.  This is what I'm using for income tax rates (2015).  Am I wrong?

Yes, incorrect and maybe you can retire earlier than you think if you were planning on a lower level of income from RRSPs than you will receive?  Here is a calculator that shows you how it works:

https://simpletax.ca/calculator

On 20k you'll owe about $1,784 in tax: $1,279 in federal tax and $505 in provincial tax.  You each are withdrawing so you each pay separately on 20k - not together at 40k.  The after-tax income is $18,216. The average and marginal tax rates are 8.92% and 20.06%.

K-ice

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Re: Canada - FIRE with RRSPs
« Reply #22 on: November 08, 2016, 12:45:23 PM »

https://simpletax.ca/calculator

On 20k you'll owe about $1,784 in tax: $1,279 in federal tax and $505 in provincial tax.  You each are withdrawing so you each pay separately on 20k - not together at 40k.  The after-tax income is $18,216. The average and marginal tax rates are 8.92% and 20.06%.

Thanks for the link.

I'm always pleasantly surprised with the difference between my average and marginal tax rate.

Because of my deductions including: pension, RRSP max out, rental property expenses and daycare deductions my average tax rate was quite low.  (Sure much of that is deferred tax I will pay later. Or real expenses where the money is gone. )

Just to confirm, when calculating Average should you take?

Total tax paid (Line 420)/Net income (Line 150) = average tax

or

Total tax paid (Line 420)/Taxable income(Line 260) = average tax

or something else.  Line 420 may leave out Provincial tax.

People who are afraid of jumping into a higher tax bracket do not really understand how the tax system works.  It is not a steep step change but just a gradual change in slope.

OAS claw-backs are however a concern with $72K plus income in retirement.

Other than that, does anyone see any reason why you would want to earn less than $70K in retirement?






totoro

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Re: Canada - FIRE with RRSPs
« Reply #23 on: November 08, 2016, 01:56:04 PM »
I'd just use the calculator to get your average.

SpaceBrokoli

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Re: Canada - FIRE with RRSPs
« Reply #24 on: November 17, 2016, 03:17:37 PM »
This is a bit more complicated but beneficial for me as I plan to have nonregistered investments as well (mainly XIC).

If you plan on taking out only 20K, then it makes more sense to pull 11K from RRSP and get taxed 0$. the remaining 9K should ideally come from Canadian dividends then foreign dividends, then capital gains and then either employment, RRSP or interest income. This is in the order of tax efficiency as far as I understand.

Since you do not have a non-reg account, you will get taxed more compared to other sources for this 9K.

Prairie Stash

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Re: Canada - FIRE with RRSPs
« Reply #25 on: December 01, 2016, 01:53:10 PM »
http://www.taxtips.ca/rrsp/withholdingtax.htm

It depends on age. Always make sure you pull out enough tax free money every year; $11k or so.

If you don't need the cash, transfer it into a TFSA for safe keeping.

Remember with holdings aren't kept by the government. You can get back any of it that isn't used to pay your taxes. For example if I pull $10k out and have no other income, I'll get all the withholding back

Stachey

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Re: Canada - FIRE with RRSPs
« Reply #26 on: December 10, 2016, 09:39:25 AM »
  Also, you've got the tax rate wrong I think though? Your average tax at 20k each is going to be 8.92% not 23%, so you'll each get a significant refund of $4200 or so - or am I missing something?

Provincial plus federal: 20% at 20k, 23% at 40k.  This is what I'm using for income tax rates (2015).  Am I wrong?

Thank you so much for posting about the simple tax calculator!  That thing is awesome! 

Yes, incorrect and maybe you can retire earlier than you think if you were planning on a lower level of income from RRSPs than you will receive?  Here is a calculator that shows you how it works:

https://simpletax.ca/calculator

On 20k you'll owe about $1,784 in tax: $1,279 in federal tax and $505 in provincial tax.  You each are withdrawing so you each pay separately on 20k - not together at 40k.  The after-tax income is $18,216. The average and marginal tax rates are 8.92% and 20.06%.


MMMdude

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Re: Canada - FIRE with RRSPs
« Reply #27 on: December 10, 2016, 10:53:05 AM »
Google RRSP meltdown strategies -discussed to death elsewhere

As others have mentioned, although witholding tax will be 30% that has no bearing on your final tax bill....ie you will likely get a nice refund come tax time.  I would suggest RRSP draw late December and then refund would come in March/April.

Really you need to play around with taxtips.ca calculators to figure out real $'s based on your situation.