rrsp withdrawal optimization

[oldpharm]

Hello,

My spouse is soon to be retired with a $60,000/yr pension (55yrs). I will continue to work for another few years till all the wee ones are done with university. I wonder if anyone has experience with rrsp withdrawals in Canada. My gut feeling is that the majority should be withdrawn before either of us turns 60 and begins to receive government pensions. This would reduce the annual taxable income. Withdrawal is mandatory starting at age 71 which is when all the maximum benefits are being paid out. Is it wise to consult a tax consultant, if so what credentials are recommended? The ones I see advertised seem to be largely financial planners and so far I have not found them to be all that helpful.

Thanks!

[Kazimieras]

Your best bet to find a good accountant and do some estate planning with them, since this is what you're effectively doing. Each situation is very unique and requires a lot of adjustments based on how you live, how long you expect to live, do you want an inheritance, what assets and/or income sources do you have, etc. So a few things:

RRSPs are great to defer paying taxes, but that's all that they do.  You will need to pay taxes on withdraws, and the trick is to have your income be less during withdraw than when it was put in (saving you some money on taxes). At 71 your RRSP becomes a RRIF and slowly depleted or it must be turned into an annuity. Each has their own pros and cons. Another large factor is how much do you have in your RRSPs (each of yours). If you have $1M in your RRSPs that will very much change how you approach things as compared to if you have $100k.

I am going to assume that there is no penalty for taking retirement for your spouse at 55, and that they cannot get additional payouts by deferring until they turn 60 or 65. An option is withdrawing from your RRSPs during the gap between when you stop working and when you start taking your pensions.

You will need to find out how much you'll be earning through CPP, and I think they have a calculator on their website. As your income climbs up, it gets clawed back. I also know there are some fairly steep penalties for taking it before 65 (or 67 depending when you are born), so do not take this one early. OAS also exists but that is generally for lower incomes, although calculators also exist to show when you can start claiming that (if at all).

Basically, this is complex and a lot of information is needed to make a good decision. Withdrawing from RRSPs before retirement incomes kick in is good, if and only if those incomes will be reduced based on your expected withdrawal rate from the RRSP.

[oldpharm]

Thanks for your comments, I will consider looking for an accountant as you suggest.

[MorningCoffee]

I've come across two articles about rrsp withdrawal strategies lately. I do agree seeing a professional is helpful but I think it's important to educate yourself first.

http://www.moneysense.ca/retire/how-to-tap-your-rrsp
http://retirehappy.ca/developing-rrsp-withdrawal-strategies/

[oldpharm]

Helpful links,thanks!

[BPA]

I've come across two articles about rrsp withdrawal strategies lately. I do agree seeing a professional is helpful but I think it's important to educate yourself first.

http://www.moneysense.ca/retire/how-to-tap-your-rrsp
http://retirehappy.ca/developing-rrsp-withdrawal-strategies/

+1  I agree with becoming as knowledgeable as possible on your own. 

I know it's been a while since you asked, but I thought I would post a link to a book, which although dated, might help:

http://www.chapters.indigo.ca/books/Why-Swim-Sharks-unconventional-guide-Diana-Salomaa-Henry-Dembicki/9780973706000-item.html?s_campaign=aff-001-2165234-Money+Works+Media+Inc.-Ongoing_Site_Indigo+Redirect_Text-10437934-2612694

It's out of print but might be available at your public library.

I plan to withdraw all of my RRSPs before I am eligible for OAS.  I also plan to live for several years on the Basic Personal Amount (hence my username).  There is certainly a lot to consider, but by checking out current OAS tables, you should be able to figure out on your own how to avoid clawbacks.  Admittedly things are simpler for me because I am single and plan to live at or as close to the BPA as possible.

Good luck.

[RealCanadianSavings]

I would start by putting together a spreadsheet and estimating your income sources and expenses per year. It's fairly easy to look up OAS clawback rates, but basically if you're earning more than $72K then you'll start seeing a loss in benefits: http://www.retirementadvisor.ca/retadv/apps/clawback/clawback.jsp?toolsSubMenu=post

What you want to do is try to keep your income stream level and avoid pushing your tax bracket up in some years and down in others. This may mean that you need to start taking RRSP payments earlier.

You will need to find out how much you'll be earning through CPP, and I think they have a calculator on their website. As your income climbs up, it gets clawed back. I also know there are some fairly steep penalties for taking it before 65 (or 67 depending when you are born), so do not take this one early. OAS also exists but that is generally for lower incomes, although calculators also exist to show when you can start claiming that (if at all).

I disagree about CPP. I think you should consider taking it early. Start by looking at the math by using your new spreadsheet. It's 30% less if you take it early, but do you really think you're going to live until 95? If you have any health issues at all, then take it early. Even if you don't need the income at age 60, you could still invest it in your tfsa and net 7% returns. When you add in the investment return, the  numbers are a lot less compelling for waiting until age 65.

[RetiredAt63]

Above suggestions are all good.

You have a bunch of things all affecting income:
Pensions
RRSP/RRIf and when to withdraw
CPP
OAS

As RCS said, there are lots of online sources for RRIF minimum withdrawal rates.  The  % each year is based on the RRIF's value at the beginning of the year, so if it is doing well, it will make more than you withdraw if you are taking out the minimum.  Eventually it will make less as you have to withdraw a larger %, and the total will start going down.  The %'s are huge by 90 (not that there will be much left by then), so if you expect to live longer, you want to get it out and into other investments for when you are 98. If you don't need the income, you can put it in a TFSA or other investments until you do need it.  The older spouse can also use the % of the younger spouse, which means a smaller % withdrawal.

OAS -starts at 65, no benefit to delaying that I am aware of - anyone know more about it? 

CPP - of course the government has put in incentives to encourage you to delay taking it, but the payout to your estate (if you should die early) is tiny, so worth taking it out and, again, investing what you don't need.

My bank's financial planner pointed out that most people delay their RRIF until 71, when it is a fairly big %, and since they are already getting OAS they have a big jump in income and get hit with taxes.  Better to take as much income from various sources as you can before 71, invest what is not needed (if you can leave it until 71, you didn't need it, right?) and plan for as much as possible to be tax-sheltered.

Hope this helped a bit.