Older friend's dilemma (how to spend money!) | Page 4 | General financial discussion | Discussion forum

It's an infantile abuse of the PM's name.

Friend plans to empty RRSP/RRIF while alive because he thinks that will result in less tax than if it's taxed on death, is what I'm understanding. How does he plan to draw it down without gov't getting benefit of taxes on that RRSP/RRIF withdrawal income?

Many wise words from Loonie. A few supporting comments.....

To the extent there is disproportionate income between the spouses, CPP equalization once CPP starts for both, and pension income splitting (RRIF, DB) once both are 65+ using good tax software that iterates and optimizes for the best split is almost always the optimum solution. Good software takes into account things like the pension income credit, age credit, medical deduction, etc.

It is almost always a good thing to have enough qualifying pension income to take advantage of the $2k pension income credit (both individuals) at age 65. That is tax free money.

It is almost never a bad thing to defer taxes in whole or in part from registered accounts as long as possible. RRIFmetic software (no longer workable due to the death of the founder Steve Salter), VPW withdrawal spreadsheet, etc will almost always result in the present value of deferral being better, regardless of absolute value of taxes eventually paid, which is an unknown anyway due to the variable returns of one's investments, date of death, etc.

Reserving a good chunk of the portfolio to pay for potential health needs late in life is something everyone should plan for. If it is not used due to dying healthy and/or early, and there is a lump sum that gets taxed, so be it.

If the OP's friend is not software savvy enough to run spreadsheets such as VPW, I fully agree it is worth paying a financial planner to run a number of 'what if' scenarios for various situations. It is more important to focus on net cash flow received from such models under the various scenarios than to get torqued up about taxes paid.

I was thinking further about this situation.

Assuming this couple is now retired or earning little, it would probably be wise for them to apply for CPP now, and ask for pension sharing. CPP pension sharing has an advantage as a first step because it doesn't increase his taxable income, and will almost certainly reduce it. He can then choose to top it up with RIF funds annually.

The problem then becomes how much to top it up.

I think there are basically 3 choices:
1. Top up only as far as OAS clawback threshold.
2. Don't worry about OAS threshold; take out more money, amount to be influenced by marginal tax rates.
3. Take out enough that you can split some of it (up to half) with wife's income, but this will likely put him into or close to OAS clawback, at least by age 72.

Whether or not he chooses to gradually empty the RIF, the taxes will be significant, but marginal rate and clawback can be controlled to some extent.

Some people have found, after running the numbers, that they would do better to take the hit on the clawback and empty their RIF within a limited number of years. Calculating this really requires a good financial planner but could be worthwhile. Once it's done, there are no more clawbacks due to it. It has one important advantage over letting it dribble away in mandatory withdrawals, leaving a large sum still intact at death to be taxed at over 50%, namely that you do get cash out of it and accessible to do with as you wish during your lifetime. None of the money sitting in your RIF at death of both of you will ever be any use to either.

Just different priorities, I'm not one of them either but to some folks it's a priority to leave max dough to beneficiaries. I can understand it if you aren't denying yourself anything, maybe your retirement needs and wants are fully met and one of your remaining pleasures is thinking you'll be remembered more fondly thanks to your bequests.

Though I do think the financial industry kinda pushes the idea too, just like they push a lot of ideas that results in them managing pools of money for long periods of time.

Why glad to be rid of it, Loonie?
Is it not better to keep funds longer in registered account to avoid taxes on interest?

OAS can be deferred until you turn 70, google and you'll find details if you want.

Loonie said
I'm not trying to suggest what this person ought to have as a goal. I'm just suggesting options and how to assess the outcomes. The rest is up to him.

The financial industry puts a lot more emphasis on encouraging you to contribute to
RSPs than on explaining the range of long term outcomes. Then, later, when people find out, they are angry at the government, but the rules have never fundamentally changed.

For spouse and I, it makes good sense to whittle down our RIFs with extra withdrawals, but we have particular circumstances, and one of those is probably uncommon. I stopped contributing when I realized what the outcome would be.

My RIF will be all gone this year, thank goodness, and I will be 77. It has taken longer than I thought it would, but glad to be rid of it.  

Oh, you're younger than I thought you were, Loonie!

But, yes, I agree, RRSPs, particularly if you don't have a workplace pension of any kind provide little, if any, tax benefit. I would rather see the TFSA contribution limit increased to a maximum of $10-15,000 per year and RRSPs eliminated. Even just increasing the TFSA annual limit to $10,000, where it was for one year until Turdeau Trudeau and the Liberals having taken office in 2015, combined with the elimination of RRSP contribution room would be a huge step forward.

It's one of the reasons I bought a studio condo actually because (a) my condo I'd live in doesn't generate taxable interest income , thereby reducing my total taxable income for the year, (b) everyone needs a place to live, and (c) as a single person who lives modestly on $10-15,000 in expected annual expenditures with an expected annual gross income of $55-60,000, I still have plenty of room to save. I'd honestly rather invest in a taxable investment account where and when I've maxed out my TFSA (which I haven't yet), as at least then, I know what I've already paid in taxes.

Cheers,
Doug

AltaRed said
People tend to forget they were 'privileged' to be able to use 'before tax' income to fund an RRSP and get a tax deferred loan from the taxpayer to invest in a RRSP. All that RRSP/RRIF withdrawals do is to re-pay the tax owed to the taxpayer in the same way an annuity (DB pension) income does. Too much is made of RRSP/RRIF withdrawals being taxed as Other Income. It is exactly as it should be.

That said, I agree everyone needs to complete their own assessment (or have a competent financial advisor run scenarios) taking all the variables into account. Any such scenario is going to be a best guess anyway since none of us can forecast portfolio returns, or tax rates, or personal circumstances (health, longevity, etc) with any accuracy. Be ready to adjust when and as necessary if circumstances change significantly enough to warrant a change. That is the best any of us can do.  

That's true, yes, but structurally, the RRSP is a terrible product. It would be better if the federal government would revamp the pooled registered pension plans to create one, federal government-created, multi-employer sponsored, voluntary pooled registered pension plan, so any employer could opt in. They wouldn't be required to provide matching contributions, but there would be added corporate incentives for doing so. Individuals could immediately contribute, and there'd be essentially no paperwork for employers opting in. It would be like a true DC pension plan, with no ability to withdraw funds before retirement age and would come with creditor protections.

Cheers,
Doug