How to get the most out of your registered retirement income fund (RRIF)? This is what bothers a reader who submitted the following question to us: “Disposing of a portion larger than the planned mandatory withdrawal, even if our other income is sufficient, is it a good idea to be able to benefit from the support to seniors in future years, to better distribute future taxes or to avoid large tax withholdings upon death? I would very much appreciate a full analysis of all options. »
The overview of possible options in this area hoped for by our reader is both simple to do and complex to detail. In fact, either the withdrawals are done “gropingly”, which is frequently the case, or they are part of a personalized disbursement plan, which must then be aligned with good integrated financial, tax and estate planning.
First, let’s go back to basics. The RRIF is made up of amounts transferred from one or more registered retirement savings plans (RRSP) accumulated during working life. It allows retirement to be financed through annual withdrawals. The first withdrawals must be made before the end of the calendar year of 72e birthday of the annuitant. Once the RRSP is converted to a RRIF, a certain percentage of the value established at the beginning of the year must be withdrawn. The older you get, the more the minimum withdrawal percentage increases.
Optimal disbursement
Contrary to what our reader seems to suggest with his question, the best strategy is not to accelerate the disbursement of investments held in a RRIF, especially when other income is available, as is the case for our reader. By starting his withdrawals faster than necessary, the latter will have to assume the direct consequence of a choice which will then place him in a higher tax bracket. In such a case, he will have to pay more tax immediately, which makes it an unfavorable option compared to the possibility of paying part of it later.
First, you should know that a higher taxable income generally also means sometimes lower government benefits, as is the case for Old Age Security (PSV) pension benefits. Too hasty withdrawals would therefore not be without consequences, especially for those who have less room for maneuver: you could reduce your available liquidity or even exhaust your capital more quickly.
Furthermore, it is not impossible, in the event that the RRSP balance is small compared to a retiree’s other investment accounts (e.g.: TFSA), that the accelerated disbursement will later allow certain retirees to benefit from targeted measures, such as the guaranteed supplement. But we are talking here exclusively about retirees with modest incomes and a very low cost of living.
The real cost of living approach
We must aim for the ideal disbursement. Does this seem vague to you? The key to optimal disbursement is to take into account the retiree’s real cost of living, which cannot be more concrete! Once the monthly living amount has been determined, it then becomes possible to reduce the taxes payable on the gross income required to meet this need. To achieve this, you must first consider the sources of income already available, before even thinking about withdrawing investments from the RRIF and other investment accounts. The subsequent stage will make it possible to decide on income disbursement strategies. It will then be necessary to establish the difference between real needs and net available income.
For example, if you benefit from pensions from the Régie des rentes (RRQ), the PSV or even a private retirement plan, you will first live on this amount, and you will be taxed on this income. Then, you could prioritize withdrawing non-registered investments whose returns are not tax-exempt in order to complete the minimum RRIF amount. In certain cases where the PSV recovery threshold could be reached, the disbursement will have to combine — differently from one person to another — the withdrawals between all investment accounts.
The question of taxes at death
Obviously, optimizing the living tax situation is based on deferring taxes over time. Taxes never go away, they have to be paid one day or another. This day is often that of death. By wishing to pay more taxes immediately to leave a lower tax bill to pay to his estate, our reader risks instead reducing the overall wealth to be passed on to his heirs.
Fortunately, estate planning makes it possible to relatively accurately assess the taxes that will be deferred upon death — or upon the second death in the case of a couple using the spousal tax rollover by will — and to plan for the liquidity required by the estate. to facilitate the transfer. There is no doubt that, if our reader has sufficient income not to withdraw more than the minimum from his RRIF, he will benefit from adding an appointment with his financial planner to his summer agenda.