Move to a RRIF by age 71
RRSPs serve to defer taxes from high-income periods to lower ones, fostering tax savings and enabling tax-free growth. By age 71, Canadians are mandated to convert their RRSPs to a RRIF or an annuity, necessitating minimum withdrawals. The minimum required withdrawal in the early years of the RRIF is in the 5.5% - 6.5% of asset range, but investors can draw any amount over that minimum. However, delaying withdrawals until this point may limit flexibility and inadvertently elevate tax brackets, particularly for those with significant RRSP holdings.
There is also an estate consideration with your RRSP / RRIF accounts. For couples, the rules are that if one spouse dies the assets of the RRSP / RRIF can transfer to the surviving spouse tax free. Upon the death of the second spouse the RRSP / RRIF is deemed to have been withdrawn in its entirety. If there is a large balance in the RRSP / RRIF this balance would be taxed at a very high tax level to the estate.
Delays in withdrawing RRSP funds can lead to unintended consequences, including higher taxes and adverse effects on tax credits like the Age Amount non-refundable credit ($7,635 for 2021) and the Pension Income credit ($2,000 for 2021). These credits may diminish due to mandatory RRIF minimums at age 71, affecting tax brackets and OAS claw backs, which intensify as the minimum withdrawal rates increase with age.
Strategies to Optimize RRSP Withdrawals:
- Deferred CPP and OAS: Postponing CPP and OAS until age 70 increases benefit amounts. You could use your RRSP assets in the early years of retirement to bridge the income gap, allowing for RRIF drawdowns at lower tax brackets later in life.
- Early RRIF Initiation: Begin a RRIF at 65 to leverage the $2,000 pension income credit. This credit enables a tax-free withdrawal of $2,000 annually from the RRIF if there's no other pension income. If you draw funds from a RRIF account at age 65 and your spouse is at least age 60, income from this withdrawal can be split for tax purposes between the two partners.
Reinvest RRIF withdrawals in tax advantageous options.
One downside to withdrawing from a RRSP or RRIF is that you may lose many potential years of tax-free compounding savings. While there would be some tax on the withdrawal, the net proceeds could be reassigned to TFSA accounts. In 2023 the lifetime TFSA contribution limit was $88,000 per person. 2024 annual contribution amount increases to $7000 per person. TFSA accounts can pass from one spouse to another on the death of the first spouse and, unlike RRIF accounts, assets in the TFSA upon the death of the second spouse pass to the estate tax free.
Consider the Annuity Option
Annuities come in a variety of different forms, but the basic description is that they are an insurance product that provides a fixed payment and predictable returns. Once the annuity is purchased the terms and payments do not change, there is no potential for further growth as in equity investing. Factors contributing to the size of your annual payment include your age, your sex, when you purchase the annuity, interest rates and whether you wish to add some guaranteed payment options.
A Joint & Last Survivor annuity makes payments until the death of the second spouse. The payments can continue in full to the surviving spouse or may be reduced at death of the first spouse. Annual payments for continued in full option are lower than if payments are reduced at first death. This sort of annuity also provides for a guaranteed payment option. If death of the second spouse occurs before the guaranteed period, the beneficiaries of the estate receive payment.
It is always wise to consult a financial advisor before initiating RRIF payments. You may also wish to get an opinion from your accountant on an early draw down strategy. Discuss RRIF minimums, secondary incomes' impact on tax brackets, and optimal CPP/OAS initiation with your advisor. Ensure tax efficiency across all income sources to maximize the benefits of your hard-earned retirement savings.