RRIF withdrawal - Different FI - Different process | RRSPs and RRIFs | Discussion forum

Previous discussion on this topic here https://www.highinterestsavings.ca/forum/oaken-financial/oaken-retirement-savings-product-is-it-rsp-or-rrsp/

There was also a previous thread on annuities which is relevant here. Annuities may be useful for some people as an alternative to RIF. With an annuity, you get a consistent payout annually, whereas with RIF you are subject to government minimums which gradually increase and can get quite hefty at the top end. These different systems have implications for income tax.
You have to look very carefully when shopping for annuities. There is a lot to learn about them.

Cranston said

Keep in mind there is no such thing as a death tax but there are probate fees. In BC and if you do it your self, probate fees average 1.6% and probate court costs and notary fees are no more than $500. BUT income tax can be a huge hit especially from RRIF or RRSP funds.

That's why I put "death tax" in quotes earlier. Technically, it isn't, but in fact it is because you only pay the very high marginal rate when you die and leave a lot of money in your RSP/RIF. If you live long enough to spread it out or cash it gradually, you can usually avoid the high rate. so, effectively, it's a death tax rate.

I understand that it's a retirement plan and not an inheritance plan, but, still, I think it's unfair for people to be taxed at a higher rate than the refund they got when they first took it out. And this is why I think that, although RSPs may become less popular, the govt won't be in any hurry to get rid of them - too lucrative.

It's not fair if I'm taxed at higher rates than when I claimed the deduction, it's only fair if I'm taxed at lower rates than when I claimed the deduction.

And a big part of the marketing of RRSPs is the immediate tax deduction, no way the sellers of retirement products are going to suggest deferring the deduction.

And what kind of a choice is that - why would you ever want cake that you can't eat??

AltaRed said
That dilemma has been argued many times. Bottom line is the investor had the use of taxpayer money (deduction refund) available for investment purposes for all those years (at whatever marginal tax rate it was at the time). It is only fair they get it back and a share of the profits at time of withdrawal.

That said, marketing of RRSPs should include some investor education that while the contribution may/should be made even in low earning years, hold back on the deduction until one is in at least the big middle class tax rate, and if lucky in the next tax bracket. Too many people are deducting contributions while in the first 15% federal tax rate and that is simply not advantageous.

The way to avoid the big tax hit on a pre-mature death is to annuitize at least some of the RRSP/RRIF account and take the risk on longevity. That said, a pre-mature death results in money being left on the table in both cases, i.e. cessation of annuity payments, or a big tax bill on the RRSP/RRIF... assuming 'last to die' of course. An annuity can be bought as a joint (last to die) annuity, and a RRSP/RRIF can be transferred to a surviving spouse (as a beneficiary).

We can't have our cake and eat it too.  

You get taxed on the profits too, when there are profits. The issue is being taxed (on principal and profits) at an exhorbitant rate just because you happened to die at the wrong time. I don't see how that is ever fair except to say that it's for retirement, not for inheritance, by design, so too bad if nothing left over. But when it's my money, I don't buy that argument either.
The thing is, if you put money in RSPs when you're young, as many of us did (when TFSAs did not exist), you have no idea how long you'll live, how much money you'll ever make, how much you'll have in retirement, etc., so you think it's a safe conservative idea to put money in RSP. Then if it turns out you had more than you thought you might, and you don't live to 100+, you get dinged with the death tax.
At best, we get told it's a tax deferral. But that is evasive too as it avoids the fact that you may end up paying more tax than you would have if you'd kept the money out of the RSP, or you may end up paying less if you're a bad investor. Crap shoot. To be avoided, as with all speculative investments.

AltaRed said
Well, we get taxed on all profits (other than TFSA) anyway so whining about being taxed on profits doesn't get sympathy from me. The tax we pay on principle is also justifiable since we invested on a 'before tax' basis. We have to pay taxes on that money sometime.

  

I haven't heard anyone whining about being taxed, either on profits or principal.

The issue, for me at least, is about getting taxed unreasonably based essentially on when you happen to die. Die at 65, have no spouse? - You may well be in the highest tax bracket simply because of your RSP, your estate will get massively dinged, and your heirs will be aghast to put it mildly.

Die at 100? - you will have minimized or cashed out your RIFs completely, and at a steady rate which attracts fair tax rate for your tax bracket and your heirs will do well as there will only be probate to pay (and lawyers!)

Here is an option I didn't know about before: the Non-Prescribed Annuity.
This is NOT a tool for your RIF, but I think it might be something that could offset the burden of increasing withdrawal rates for some people. Of course, it depends on individual circumstances.

I gather that this is the way it works:
You buy this kind of annuity with your non-registered funds (assuming you have some). Being "non-prescribed" means that it is written in such a way as to ensure that you receive an increasingly lower portion of the payout in taxable income as the years pass. (An advantage of all non-registered annuities is their low taxable income because a significant portion of the money you receive is money that you already were taxed on before you contributed it to the annuity.)

Seems to me that if one part of your income is going up at a sometimes-alarming rate (i.e. the RIF withdrawals), then this would be offset to some degree by another income source that was providing a steady income with increasingly less taxation.
I could see this being potentially useful especially starting around age 80, when the mandatory withdrawals start escalating more significantly. By the time most of us get there, interest rates might be high enough to make it quite attractive. It also offsets bad decision-making which can come after 80.

Loonie said

I haven't heard anyone whining about being taxed, either on profits or principal.

The issue, for me at least, is about getting taxed unreasonably based essentially on when you happen to die. Die at 65, have no spouse? - You may well be in the highest tax bracket simply because of your RSP, your estate will get massively dinged, and your heirs will be aghast to put it mildly.

Die at 100? - you will have minimized or cashed out your RIFs completely, and at a steady rate which attracts fair tax rate for your tax bracket and your heirs will do well as there will only be probate to pay (and lawyers!)  

Many people on a variety of forums have complained about being taxed in a higher MTR upon RRIF withdrawal and/or estate collapse than the MTR when they put money into the RRSP. While if can be true for those fortunate, and wise enough, mass a large RRSP, they also forget about the time value of tax deferment all those years too. Tax software called RRIFMetic developed by Steve Salzer can show the RRSP/RRIF wins most of the time... premature death notwithstanding. Since none of us plan for premature death, we can only do the best we can to plan on living to 90 or 95.

I don't worry about heirs/beneficiaries other than my spouse, the latter of which can get to it with a spousal rollover if beneficiary designations are in place. My supposed 'other' heirs can and should fend for themselves and be greateful for any crumbs sent their way. Actually they will likely do well, and my executors should be smart enough to donate enough shares in kind to offset much of the estate taxes anyway. A charitable cause can do wonders to decrease the tax burden or eliminate it entirely.