Author Topic: RRSP withdrawals for early retiree - tax  (Read 5968 times)

thriftyc

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RRSP withdrawals for early retiree - tax
« on: February 03, 2019, 09:23:45 PM »
Hi all:

Q: Are RRSP withdrawals taxed at the same rate as earned income from a job?

I plan on FIRE'ing soon (sometime this year) at age 46.

More info:
I plan on drawing down mostly from RRSP's until age 60-65, while letting the TFSA's grow, which as 60-65 will starting drawing down on the TFSA's

FIRE income will come form the following combination of sources until 60-65.
- my rrsp
- wife's part time income
- wife's rrsp
- wife's non-registered Canadian dividends and perhaps some capital gains
- CCB
- any "accidental" income I earn

Malkynn

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Re: RRSP withdrawals for early retiree - tax
« Reply #1 on: February 04, 2019, 04:00:07 AM »
Curious:what's the rationale to try and draw down your RRSPs so quickly? The conventional approach is to draw them down over a long period of time to minimize the taxes.

Unless you have fairly small RRSP savings and are planning on withdrawing only $10-12K per year until 60 when CPP and OAS kick in.

It all depends on the numbers involved.
« Last Edit: February 04, 2019, 04:03:09 AM by Malkynn »

RichMoose

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Re: RRSP withdrawals for early retiree - tax
« Reply #2 on: February 04, 2019, 11:01:37 AM »
Yes, RRSP withdrawals are taxed the same as employment income. However, it is not considered to be earned income so CPP and EI don't apply.

techwiz

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Re: RRSP withdrawals for early retiree - tax
« Reply #3 on: February 04, 2019, 12:40:20 PM »
My understanding is RRSP withdrawals are considered to be income.

Below is a cut and paste from a RRSP Withdrawal FAQ
 
"The financial institution that administers your RRSP account will send you a T4RSP Statement of RRSP Income information slip after the calendar year end for the year your RRSP withdrawal occurred. On the T4RSP slip, in Box 22 Withdrawal and Commutation Payment, will be the full amount withdrawn from your RRSP account. On the same T4RSP slip, in Box 30 Income Tax Deducted, the total withholding Tax deducted from your RRSP withdrawal will be stated. Both of these numbers are entered in your income tax return. The withdrawal amount will increase your taxable income and the withholding tax paid will be a credit as income tax paid.

Careful consideration should be given to the secondary factors that an RRSP withdrawal may trigger. Namely, the resulting increased taxable income may negatively impact your Old Age Security and Guaranteed Income Supplement payments. The increase in taxable income may reduce benefits you receive from the province such as Pharmacy and Healthcare costs subsidies, which tend to be income based. A withdrawal from an RRSP may also negatively impact government transfer payments such as Family Allowance and GST refund payments."

thriftyc

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Re: RRSP withdrawals for early retiree - tax
« Reply #4 on: February 04, 2019, 12:50:19 PM »
Curious:what's the rationale to try and draw down your RRSPs so quickly? The conventional approach is to draw them down over a long period of time to minimize the taxes.

Unless you have fairly small RRSP savings and are planning on withdrawing only $10-12K per year until 60 when CPP and OAS kick in.

It all depends on the numbers involved.

I did not say I would be drawing them down quickly.  More like, over the next 25 years or more depending on growth and balance remaining.  Remember, I am 46.

RRSP withdrawals are taxed, TFSA's withdrawals are invisible in terms of tax, OAS clawback.   I longer I wait to drawdown the RRSP, the larger it will get and the bigger the clawback and taxes in later years.   
« Last Edit: February 04, 2019, 12:52:53 PM by thriftycanuck »

daverobev

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Re: RRSP withdrawals for early retiree - tax
« Reply #5 on: February 04, 2019, 02:10:46 PM »
Taxed as income yes, in exactly the same way that they were tax deferred when the money went in.

Just bear in mind that because it is income, it lowers CCB. If you are in that 30-60k household income it is fairly nasty. I'm not saying there is necessarily any way around it, just that it is. Well - maybe you could borrow from a HELOC for a few years if the child/ren are close to fledging age (as in, 10% loss of CCB is worse than paying 5% interest!).

snacky

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Re: RRSP withdrawals for early retiree - tax
« Reply #6 on: February 04, 2019, 02:35:27 PM »
My plan is to draw down the taxable accounts first, then the RRSP, and hopefully only have the tfsa left when I turn 65. Isn't there a penalty for tapping the RRSP before 50?

daverobev

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Re: RRSP withdrawals for early retiree - tax
« Reply #7 on: February 04, 2019, 02:41:53 PM »
My plan is to draw down the taxable accounts first, then the RRSP, and hopefully only have the tfsa left when I turn 65. Isn't there a penalty for tapping the RRSP before 50?

Only in that your financial institution may charge a 'partial deregistration fee'. You could convert it to a RRIF instead, the only thing is that you have to take a minimum out each year (which is low if you are young), and get monthly/quarterly automatic payouts instead (check the fees; usually worth doing if you're SURE you want to start taking money out and there are fees for RRSP withdrawals).

Malkynn

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Re: RRSP withdrawals for early retiree - tax
« Reply #8 on: February 04, 2019, 04:43:51 PM »
Curious:what's the rationale to try and draw down your RRSPs so quickly? The conventional approach is to draw them down over a long period of time to minimize the taxes.

Unless you have fairly small RRSP savings and are planning on withdrawing only $10-12K per year until 60 when CPP and OAS kick in.

It all depends on the numbers involved.

I did not say I would be drawing them down quickly.  More like, over the next 25 years or more depending on growth and balance remaining.  Remember, I am 46.

RRSP withdrawals are taxed, TFSA's withdrawals are invisible in terms of tax, OAS clawback.   I longer I wait to drawdown the RRSP, the larger it will get and the bigger the clawback and taxes in later years.

Sorry, for some reason I interpreted that you were trying to completely draw down your RRSPs for some reason, which seemed odd to me, but I think I read it too quickly.

Totally agree, start drawing down RRSPs asap.

Goldielocks

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Re: RRSP withdrawals for early retiree - tax
« Reply #9 on: February 08, 2019, 02:50:30 AM »
My plan is to draw down the taxable accounts first, then the RRSP, and hopefully only have the tfsa left when I turn 65. Isn't there a penalty for tapping the RRSP before 50?

If your taxes are not very high in a given year, you can pull some extra money from the RRSP to top up your new TFSA room each year, and re-invest it, tax free.  The number one goal is to keep the TFSA maxed out whenever possible and you are in a moderate or low tax bracket.  TFSA's rock.

Lews Therin

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Re: RRSP withdrawals for early retiree - tax
« Reply #10 on: February 08, 2019, 07:35:24 AM »
My plan is to draw down the taxable accounts first, then the RRSP, and hopefully only have the tfsa left when I turn 65. Isn't there a penalty for tapping the RRSP before 50?

That`s for the US people @snacky  , for us it`s simply a withholding tax (their estimation of how much taxes you'll have to pay on it at the end of the year) you either get that money back at the end of the year, or it`s used as part of your tax bill. There`s no penalty for us to take it out at any point.

daverobev

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Re: RRSP withdrawals for early retiree - tax
« Reply #11 on: February 08, 2019, 07:50:47 AM »
My plan is to draw down the taxable accounts first, then the RRSP, and hopefully only have the tfsa left when I turn 65. Isn't there a penalty for tapping the RRSP before 50?

That`s for the US people @snacky  , for us it`s simply a withholding tax (their estimation of how much taxes you'll have to pay on it at the end of the year) you either get that money back at the end of the year, or it`s used as part of your tax bill. There`s no penalty for us to take it out at any point.

Just bear in mind from a cashflow perspective, there are thresholds for the *percentage* they will withhold. And also partial deregistration fees. So on one hand, for cashflow, it is better to take multiple (I think the first level is $4999?) withdrawals so the total withheld will be less; on the other, if for whatever reason you don't want to convert to a RRIF, it is better to take one lump sum, lose the withholding temporarily, and get it back in ~April. Or, have a lower tax bill to pay.

snacky

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Re: RRSP withdrawals for early retiree - tax
« Reply #12 on: February 08, 2019, 08:01:40 AM »
That is good and useful information. Thank you.

bluebelle

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Re: RRSP withdrawals for early retiree - tax
« Reply #13 on: February 08, 2019, 09:47:28 AM »
I'm retiring next year at 56.  My plan is convert a small amount of RRSP to a RRIF to draw from.   Don't convert all of your RRSP or you'll get hit with minimum RRIF withdrawal amounts.....that would reduce some of the potential rrsp withdrawal costs.  As an added bonus, RRIF payments will qualify you for the pension credit when you turn 65 (CPP does not), it reduces your taxable income by $2,000, so, yay, small bonus.

I have the MPP of potentially having too large an RRSP, especially if I wait until 71 to start drawing....I don't want to have my OAS clawed back because I didn't plan ahead.  And remember, if one spouse passes away, the RRSP or RRIF transfers to the surviving spouse tax free, but your minimum withdrawal will double.   (I get it, the 'real' world has no sympathy for us savers that have 'too' much in their RRIF)

I like how you're thinking.....thinking about the lifetime amount of tax you'll pay, rather than just next year.

I like ernst and young for an easy tax calculator - they don't have 2019 out yet
https://www.ey.com/ca/en/services/tax/tax-calculators-2018-personal-tax

thriftyc

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Re: RRSP withdrawals for early retiree - tax
« Reply #14 on: February 08, 2019, 10:26:18 AM »
Regarding withholding tax, I don't really care to much about that.  Plan to to withdraw the 12 months worth of expenses less wife's projected part time income and less projected CCB toward end of Dec each year in order to receive tax refund on the withholding tax a couple months later.  Our tax brackets will be lower than the withholding tax.   We will keep a cash buffer in a savings account to help manage this.

bluebelle

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Re: RRSP withdrawals for early retiree - tax
« Reply #15 on: February 08, 2019, 11:08:49 AM »
Regarding withholding tax, I don't really care to much about that.  Plan to to withdraw the 12 months worth of expenses less wife's projected part time income and less projected CCB toward end of Dec each year in order to receive tax refund on the withholding tax a couple months later.  Our tax brackets will be lower than the withholding tax.   We will keep a cash buffer in a savings account to help manage this.
If you withdraw <=5000 the withholding is 5%
if you withdraw between 5000.01 and 10,000, withholding tax is 10%
if you withdraw > 10,000 withholding tax is 15%

sure, you're get the money back at tax time, but that's what folks were talking about when they talked about considering multiple withdrawals instead of one big one

thriftyc

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Re: RRSP withdrawals for early retiree - tax
« Reply #16 on: February 08, 2019, 11:15:18 AM »
Regarding withholding tax, I don't really care to much about that.  Plan to to withdraw the 12 months worth of expenses less wife's projected part time income and less projected CCB toward end of Dec each year in order to receive tax refund on the withholding tax a couple months later.  Our tax brackets will be lower than the withholding tax.   We will keep a cash buffer in a savings account to help manage this.
If you withdraw <=5000 the withholding is 5%
if you withdraw between 5000.01 and 10,000, withholding tax is 10%
if you withdraw > 10,000 withholding tax is 15%

sure, you're get the money back at tax time, but that's what folks were talking about when they talked about considering multiple withdrawals instead of one big one

Non issue on my end, I just care about the total net tax payable.   

Missy B

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Re: RRSP withdrawals for early retiree - tax
« Reply #17 on: February 15, 2019, 01:17:47 PM »
Not there yet, but my plan is to withdraw a lump sum of 20K or so every December, then file as early as possible the next year. That limits the time the govt keeps my withheld cash, and it also gives me the flexibility to change the amount depending on capital gains or income earned. I'll need my first year's expenses in hand, but that's easy to plan for in advance.

thriftyc

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Re: RRSP withdrawals for early retiree - tax
« Reply #18 on: February 15, 2019, 03:10:24 PM »
Not there yet, but my plan is to withdraw a lump sum of 20K or so every December, then file as early as possible the next year. That limits the time the govt keeps my withheld cash, and it also gives me the flexibility to change the amount depending on capital gains or income earned. I'll need my first year's expenses in hand, but that's easy to plan for in advance.

You could also time the withdrawals at the end of Dec, right after the ex-dividend date of your investments.   That way you still get dividends paid on what you end up withdrawing  (They will get paid in January)

daverobev

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Re: RRSP withdrawals for early retiree - tax
« Reply #19 on: February 15, 2019, 03:30:09 PM »
The price of a thing should drop by exactly the amount of dividend it pays out.

It is like a bank account. When you take money out of it, the balance decreases.

Obviously there are market fluctuations as well, but still.

If a $20 ETF pays out a 20 cent dividend, it will be a $19.80 ETF and you'll have 20 cents.

thriftyc

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Re: RRSP withdrawals for early retiree - tax
« Reply #20 on: February 15, 2019, 04:40:52 PM »
The price of a thing should drop by exactly the amount of dividend it pays out.

It is like a bank account. When you take money out of it, the balance decreases.

Obviously there are market fluctuations as well, but still.

If a $20 ETF pays out a 20 cent dividend, it will be a $19.80 ETF and you'll have 20 cents.

Is this always the case - even with a broad market ETF? 

daverobev

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Re: RRSP withdrawals for early retiree - tax
« Reply #21 on: February 16, 2019, 03:58:09 AM »
The price of a thing should drop by exactly the amount of dividend it pays out.

It is like a bank account. When you take money out of it, the balance decreases.

Obviously there are market fluctuations as well, but still.

If a $20 ETF pays out a 20 cent dividend, it will be a $19.80 ETF and you'll have 20 cents.

Is this always the case - even with a broad market ETF?

There will always be inaccuracies, but there are 'market makers' and arbitrageurs that will do their utmost to make it so, yes.

The 'problem' is that the market is always moving so you can't 'see' the exact drop (try looking at a bond fund though - it will rise by 5 cents over the month due to coupons coming due, then drop by 5 cents when it makes the payout).

There are a lot of very wealthy companies with very fast internet connections that will take fractions of cents of value out where there is a disconnect.

Even a broad market ETF? The more actively traded it is the less of a spread there will be. Of course there is the fact of different markets opening for different times, but... Look, if it was possible to make easy money like this (ie, buy the day before ex-div, sell the day of) don't you think everyone would do it... except if they did... they would exactly counter what you're talking about...

JamOnFire

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Re: RRSP withdrawals for early retiree - tax
« Reply #22 on: February 19, 2019, 09:16:50 AM »
Lots of interesting comments and replies.   Overall I plan on doing the same as I am making rsp contributions and saving taxes at a 45%+ marginal rate and, since I have a company pension, rather than withdraw when my tax rate is high, will withdraw after I stop working but before I start collecting my pension- I. E. At about 30% (per tables at taxtips.ca).

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Missy B

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Re: RRSP withdrawals for early retiree - tax
« Reply #23 on: October 22, 2019, 10:27:29 PM »
Not there yet, but my plan is to withdraw a lump sum of 20K or so every December, then file as early as possible the next year. That limits the time the govt keeps my withheld cash, and it also gives me the flexibility to change the amount depending on capital gains or income earned. I'll need my first year's expenses in hand, but that's easy to plan for in advance.

You could also time the withdrawals at the end of Dec, right after the ex-dividend date of your investments.   That way you still get dividends paid on what you end up withdrawing  (They will get paid in January)
You know I will ;)