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Email this7:23 am
May 22, 2015
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Hi,
I just started a corporation and I'm planning to take no pay from the corporation for few years. For personal income taxes, if I pull enough funds from my RRSP to cover the base amounts + credits (enough to beak even), would there be any penalties ? I know there will be tax withholding, but that's ok, I should get it back when I file my taxes. I'm pretty sure there should be no issues, but want to double check this as we have lot of expertise here.
Any thought ?
Thanks
7:33 am
October 21, 2013
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Ask your accountant for a reliable answer. You are going to have to file a corporate tax return anyway. Personally, having co-owned a small corporation, I would not want to prepare that return or handle all the ins and outs without professional help.
7:58 am
December 7, 2011
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lhsaid said
For personal income taxes, if I pull enough funds from my RRSP to cover the base amounts + credits (enough to beak even), would there be any penalties ?
No penalties at all. I'm doing that for many years.
To reduce tax withholding to 10% only, I'm taking out funds in 2 or 3 steps - first withdrawal less than $5,000, second also less than $5,000 and third less than $5,000 too.
Withdrawal over $5,000 will trigger 20% tax withholding.
8:14 am
February 20, 2018
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Winnie said
lhsaid said
For personal income taxes, if I pull enough funds from my RRSP to cover the base amounts + credits (enough to beak even), would there be any penalties ?No penalties at all. I'm doing that for many years.
To reduce tax withholding to 10% only, I'm taking out funds in 2 or 3 steps - first withdrawal less than $5,000, second also less than $5,000 and third less than $5,000 too.
Withdrawal over $5,000 will trigger 20% tax withholding.
After witholding tax is there a corresponding Tslip for those 5k amounts withdrawn?
8:41 am
May 22, 2015
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Winnie said
lhsaid said
For personal income taxes, if I pull enough funds from my RRSP to cover the base amounts + credits (enough to beak even), would there be any penalties ?No penalties at all. I'm doing that for many years.
To reduce tax withholding to 10% only, I'm taking out funds in 2 or 3 steps - first withdrawal less than $5,000, second also less than $5,000 and third less than $5,000 too.
Withdrawal over $5,000 will trigger 20% tax withholding.
I'm not worried about withholding at all. If I withdraw these RRSP amounts end of December, I get it back as soon as I file my taxes (Feb-Mar).
9:43 am
October 17, 2018
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Bud said
After witholding tax is there a corresponding Tslip for those 5k amounts withdrawn?
Yes withdrawals from RRSP are taxable so a T4RSP is issued. It's a T4 and has a box that lists gross income amount and a box that shows tax withheld.
12:41 pm
February 20, 2018
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lhsaid said
I'm not worried about withholding at all. If I withdraw these RRSP amounts end of December, I get it back as soon as I file my taxes (Feb-Mar).
how do you get it back
1:01 pm
September 11, 2013
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On your T1, line 43700, Bud.
1:02 pm
March 30, 2017
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Bud said
how do you get it back
tax refund when one files the tax I presume ?
1:03 pm
March 30, 2017
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Winnie said
lhsaid said
For personal income taxes, if I pull enough funds from my RRSP to cover the base amounts + credits (enough to beak even), would there be any penalties ?No penalties at all. I'm doing that for many years.
To reduce tax withholding to 10% only, I'm taking out funds in 2 or 3 steps - first withdrawal less than $5,000, second also less than $5,000 and third less than $5,000 too.
Withdrawal over $5,000 will trigger 20% tax withholding.
so one can withdraw unlimited transactions of $5k each and only 10% withholding tax ? That system is kind of stupid even tho yes one do gets taxed at filing time.
1:27 pm
May 22, 2015
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savemoresaveoften said
so one can withdraw unlimited transactions of $5k each and only 10% withholding tax ? That system is kind of stupid even tho yes one do gets taxed at filing time.
That's just withhold, when you file your taxes the numbers get adjusted. 10% or 20% doesn't matter that much except if you care about not being able to use that money for the period between the withdraw time and the tax return time.
1:39 pm
April 6, 2013
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savemoresaveoften said
so one can withdraw unlimited transactions of $5k each and only 10% withholding tax ? That system is kind of stupid even tho yes one do gets taxed at filing time.
That's not true.
The tax holding will be 10% until the financial institution notices what the RRSP/RRIF owner is doing.
8:24 am
March 30, 2017
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Norman1 said
savemoresaveoften said
so one can withdraw unlimited transactions of $5k each and only 10% withholding tax ? That system is kind of stupid even tho yes one do gets taxed at filing time.
That's not true.
The tax holding will be 10% until the financial institution notices what the RRSP/RRIF owner is doing.
I see. So it is up to the FI to do the policing.
How do someone due with this unique problem:
Say one can expect to have a marginal tax rate even after retirement (i.e investment income will basically take them into OAS clawback category already), is there still a clear win strategy in terms of RRSP withdrawal ? Assume the individual has 1MM+ in RRSP, and does not need the RRSP withdrawal money. To minimize the inevitable tax when it needs to be forced withdrawal starting age 71, is it optimal to start withdrawing early (lose tax free compounding) anyway to spread it out over time, or wait till age 71. Obv wait till 71 when it becomes mandatory withdrawal will potentially push it into even higher marginal bracket which I am fully aware of.
8:55 am
November 8, 2018
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savemoresaveoften said
Assume the individual has 1MM+ in RRSP, and does not need the RRSP withdrawal money. To minimize the inevitable tax when it needs to be forced withdrawal starting age 71, is it optimal to start withdrawing early (lose tax free compounding) anyway to spread it out over time, or wait till age 71.
RRSP is nicely designed trap. If you keep RRSP for after you are 65, you are gifting federal government up to $900/mo it will otherwise pay you through GIS.
If you expect to live on retirement off your savings, have only modest CPP complemented by modest OAS, if you do not have serious investment income and do not have generous pension plan, if you plan to live in Canada and not to move abroad in retirement, keeping RRSP after 65 could reduce your overall income quite a lot.
The strategy for those who fit that description is to get rid of as mush RRSP as possible before 65, ideally withdraw all of it.
Suppose, all you have at 65 is $1M in Savings and TFSA at close to zero interest rate. You plan to live till 95. You report close to zero income. The government pays you about $15,000 annually in CPP+OAS+GIS. You take $30K from Savings annually. You have $45,000 to spend on yourself annually.
Same story, but you've got to 65 with $1M in RRSP. You take same $30K from RRSP annually. You report it as income. This is above income threshold to qualify for for GIS. Without GIS, your annual spend is $35,000.
10:17 am
March 30, 2017
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Alexandre said
savemoresaveoften said
Assume the individual has 1MM+ in RRSP, and does not need the RRSP withdrawal money. To minimize the inevitable tax when it needs to be forced withdrawal starting age 71, is it optimal to start withdrawing early (lose tax free compounding) anyway to spread it out over time, or wait till age 71.RRSP is nicely designed trap. If you keep RRSP for after you are 65, you are gifting federal government up to $900/mo it will otherwise pay you through GIS.
If you expect to live on retirement off your savings, have only modest CPP complemented by modest OAS, if you do not have serious investment income and do not have generous pension plan, if you plan to live in Canada and not to move abroad in retirement, keeping RRSP after 65 could reduce your overall income quite a lot.
The strategy for those who fit that description is to get rid of as mush RRSP as possible before 65, ideally withdraw all of it.
Suppose, all you have at 65 is $1M in Savings and TFSA at close to zero interest rate. You plan to live till 95. You report close to zero income. The government pays you about $15,000 annually in CPP+OAS+GIS. You take $30K from Savings annually. You have $45,000 to spend on yourself annually.
Same story, but you've got to 65 with $1M in RRSP. You take same $30K from RRSP annually. You report it as income. This is above income threshold to qualify for for GIS. Without GIS, your annual spend is $35,000.
Yes I am aware of what you are saying. But how about someone who already generate ample investment income outside of RRSP right now, and will be in the OAS clawback even before taking into account RRSP withdrawal anyway. For someone in that unique situation, is the optimal strategy to deploy is to start winding down RRSP way earlier than a normal person would. Keep in mind for someone who already generate decent investment income today means their financial assets outside of registered account is already in the 7 figures, which will give them a comfortable retirement without any RRSP money. So withdrawing RRSP early will also put them in the high marginal tax bucket. If that is the case, then the only real benefit to withdraw sooner rather than later is any potentially tax savings from a lesser change of hitting even high marginal tax bracket which bulk RRSP withdrawal esp mandatory would.
In other words, maybe some genius financial advisor has some secret "weapon", one can not escape "OAS clawback to zero, forget GIS obv", PLUS seeing the RRSP having a massive shrinkage as it gets taxed at high tax rate at withdrawal.
10:47 am
October 21, 2013
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I agree that RSPs are a trap for most people. They really only work well in particular circumstances, and most people don't know in advance if they will be in that category.
Although I won't be getting any GIS, I have been cashing ours in for a few years now in amounts that maximize our tax bracket and trying to minimize other tax triggers.
There are 3 main reasons: first, I don't like owing unknown amounts to the government (always subject to change); second, to minimize future taxes when one or both of us die; third, it's efficient in terms of using up the tax bracket IF you are certain your income will never fall lower than that bracket anyway. I don't find the "present value of money' argument useful in this regard.
Most people have never given much thought to what happens to their RSP/RIF funds when they die. Some don't care. But the point is that if there is money that you're never going to be able to use anyway because of its tax burden, then why not minimize that tax burden? For a couple, when the first spouse dies, the other acquires the entire RSP/RIF of the deceased and adds that to their own. If you don't follow a plan to decumulate that money, the tax man could take about half of it quite easily when you're gone and will get a hefty amount while you're alive.
These are not easy calculations and they also have ramifications in terms of when you decide to take your CPP or OAS.
If you can find an accountant or CFP who is expert in decumulation strategies, it might well be worth your while to engage them. However, most are not expert in this. Actuary Fred Vettese, who has written a book on retirement income planning (look for second edition), suggests that the calculation of the CPP Survivor Pension, for example, has become so complicated that not more than a dozen people in the country really understand it. It almost certainly won't be as high as is indicated on your Statement of Contributions.
11:06 am
October 21, 2013
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I hadn't seen #35 above when I was writing #36.
I think that if you are in the highest marginal tax bracket already AND you can confidently predict that you will remain there for the rest of your and spouse's lives, then it may not make much difference. You might want to look at the angle of how much it's going to cost when you both die in more detail.
There are a couple of other possible considerations. First, we might yet see some kind of estate tax that will bump up the cost at the end. Second, the rate at that marginal rate might change. Third, the tendency now is towards a wealth tax being implemented; if so, my guess is that RSP/RIFs will be exempt, so you might want to keep it intact if you agree with my analysis and if your assets fall into this category. I believe there are some policy ideas out there as to the level at which it might kick in but I don't follow this closely.
I think your greatest vulnerabilities are likely to be changes in the tax structure or a major recession/depression, which nobody can predict.
11:27 am
September 11, 2013
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I agree that RRSPs can be a "trap" for many people, but not many people when they're young know exactly or even very approximately (especially now with the demise of defined benefit pension plans) how much income they'll eventually have in retirement so I think many view them as an insurance plan of sorts. Personally, happily I've ended up in a tax punitive situation re my RRSPs but it's kind of a 1st world problem to have, i.e. too high an income in retirement, I'm grateful to be in this situation and don't really spend any time thinking about paying more tax in my life than the minimum I possibly could have with 100% foresight.
That can be a good idea, to take out more than the minimum from a RRIF, to maximize the tax bracket, as Loonie says.
Note the GIS does not come from the government, it comes from the other Canadian taxpayers, and I think very few Canadians plan their future retirement to maximize their GIS or other freebies paid for by their neighbours. I personally know no people whose working/investing approach revolved around maximizing GIS later, and that's good as far as I'm concerned.
RRSPs can help you to retire early, you can deplete and live off them in your 60s if that RRIF income is going to cause you grief (e.g. OAS clawback, etc) later. And also if as a result you don't need CPP & OAS in your 60s you can defer them to get significantly higher amounts later.
12:01 pm
March 30, 2017
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Loonie said
Second, the rate at that marginal rate might change. Third, the tendency now is towards a wealth tax being implemented
That is a very good reminder. Chances are marginal rate will only go up in the foreseeable future to pay for all the covid handouts etc. That is an argument to withdraw early even one dont need it. I am starting to think the "tax free compounding growth" becomes irrevelant as there is NO tax benefits at the end.
At the end it is certainly a "good" problem to have (compare to the other extreme), and yes as Loonie mentioned, I believe most CFP or accountant will not be able to provide any solid decumulation strategy for that unique situation. At best they can probably come up with some estate planning such as trust etc.
Delaying OAS and CPP simply "add" to the problem lol
12:31 pm
October 21, 2013
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I think the saddest thing is people who worked at modest incomes and dutifuly put away RSP money because they had no retirement plans from their mediocre jobs. When they finally retired, their incomes were modest, just enough that they didn't qualify for GIS. They would have been better off to have never have bought into RSPs. It might have made the difference between being property owners (not taxed as principal residence) and renting (aka losing money). They bought the propaganda about RSPs, to their ultimate detriment.
While it's true you can't know what your ultimate financial status will be in retirement, it's also true that it becomes more predictable as you get closer to it. Accordingly, I suggest that in the early adult years, most people would do best to pay off debt, buy a principal residence and pay it off, and fill up TFSA room, THEN in middle age if funds available, consider whether RSPs make sense for you.
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