Withdrawal from an RRSP before age 70
Do you must withdraw the whole lot out of your RRSP before you begin your OAS or before age 70? That way, for those who die after age 70, there will likely be no RRSP/RRIF to transfer to your wife, no resulting increase in income for her, and subsequently no OAS clawback. That feels like idea; let’s play it out and see. Start by converting your RRSP to a RRIF (Registered Retirement Income Fund) so you may share your retirement income together with your wife; you may’t split RRSP withdrawals.
To deplete your $200,000 RRIF plus investment growth inside five years, withdraw about $45,000 annually while also deferring your OAS pension until age 70. The OAS pension increases by 0.6% per thirty days for every month you defer beyond age 65, and for those who defer until age 70, it’s guaranteed to extend by 36%. It is an indexed pension that’s paid for all times under current laws.
A rather higher option might need been to delay your CPP, because it increases by 0.7%/month and the initial pension amount is predicated on the YMPE (annual maximum pensionable earnings), which has historically increased faster than the speed of inflation. This implies that by delaying until age 70, CPP can increase by greater than 42%.
If your RRIF is depleted, your wife won’t receive an OAS clawback for those who die before her. Mission achieved, but we must always query the strategy. What will you do with the cash you’re taking out of your RRIF, and the way much money will you’ve got left after taxes?
Consequences of an accelerated withdrawal from a RRIF
I estimate that in Ontario, for those who withdraw $45,000 out of your RRIF, you’ll need $28,451 after taxes left to speculate. So as an alternative of getting $45,000 growing and compounding tax-free, you’ll need $28,451 growing and compounding. If you’ve got the wiggle room, ideally invest that cash in a tax-free savings account (TFSA) where it should even be tax-free. Otherwise, put money into a non-registered account. With a non-registered account, you pay taxes on interest, dividends and/or capital gains as they’re earned, and there isn’t any estate and no division of retirement income.
I actually have to confess that that is a superbly suitable strategy if you must spend the RRSP and have a good time, especially for those who know that you simply need an income of $147,000 per yr and that you’ve got indexed annuities to cover that income. The problem for me is that this makes for a brief article, so let’s get on with the evaluation.
What would occur for those who didn’t withdraw the whole lot out of your RRIF, but only withdrew enough to top up your OAS pension and deferred it until age 70? What in case your RRIF was still around $200,000 at age 72 and the mandatory minimum withdrawal was $10,800? You could split that $10,800 together with your wife and would not be affected by the OAS clawback. Of course, for those who die, the RRIF would pass to your wife, who would then not have the option to do any pension splitting and her OAS pension would likely be affected.
Stop predicting the long run and revel in your money
Randy, I feel you see that there isn’t any clear winning strategy here. Either you pull from the RRSP/RRIF balance early or let it grow. You may examine strategies that involve income averaging or early RRIF withdrawals to reduce taxes, but I often find that these are more smart-sounding strategies than winning strategies. There are so many variables to contemplate that the evaluation must be done using sophisticated planning software along side your life plan.
