At first, you’ll think investing $158,000 could be much better than $120,000 and that your tax deferral strategy – minimum RRIF withdrawals – could be the better option. However, chances are you’ll be fallacious.
When does your RRIF occur should you die?
When you die, the whole balance might be taxable as income in your final tax return unless you permit your RRIF to your spouse. If you die in January, your other sources of income could also be modest. If you die in December, your estate may have to pay more taxes.
In the case of our hypothetical 80-year-old woman, death at age 90 could end in paying about $40,000 to $50,000 in taxes on her RRIF if she only makes the minimum withdrawals. It would rely upon what time of 12 months she died, what deductions or credits is likely to be available, and so forth. Whether she takes the RRIF’s minimum withdrawals or takes additional withdrawals and puts the extra amount right into a TFSA, the after-tax value of the investments may very well be about $120,000.
In a case like yours, Anne, where your income comes primarily from government pensions and your RRIF is your primary asset apart from possibly your private home, there is probably not a compelling difference between the 2 withdrawal strategies. If someone had a big RRIF or higher income, or was younger and had more years to benefit from low tax brackets, taking additional RRIF withdrawals can provide a wealth advantage.
Who to ask for advice – and what to ask
My mother Anne became terminally in poor health in her 60s and we knew her life expectancy was shortening. We have strategically made additional RRIF withdrawals over several years to reduce the tax payable on their estate.
The point of minimizing taxes and RRIF withdrawals? A tax and estate strategy that features additional RRIF withdrawals is situation specific and will depend on the facts of the case. But I’m all for at the very least considering it.
If your financial advisor or accountant hasn’t discussed this idea with you, that doesn’t suggest they have not crunched the numbers for you, Anne. But it is likely to be value asking the query: Will additional RRIF withdrawals mean fewer taxes on my estate? Ask because most financial advisors give attention to investments and most accountants give attention to preparing your prior 12 months tax return. Attorneys drafting wills may simply accept instructions from you moderately than consider the tax implications of your estate plan. This is certainly not a knock on any of those professionals, but you should understand the constraints of any advice and ask the precise questions.
Managing your personal investments or preparing your personal tax returns means you might be also tasked with considering broader tax and estate considerations on your personal.
