The Art of the RRIF Drawdown

As we accumulate money for retirement it seems a little simpler contributing to RRSP’s, TFSA’s and other plans. Withdrawing money on the other hand can be a little more complex especially when it comes to managing the RRIF which is usually the vehicle we convert to in the income phase for RRSP’s. When withdrawn this income counts as 100% taxable income. The RRIF withdrawals can be started at any time beforehand but at age 72 there are mandatory withdrawals . Typically we always want to defer tax when we are employed but in retirement taking this approach can be a very costly move for the following reasons.

Huge tax bill upon death- When you pass away you are deemed to have sold everything you own which can result in one massive tax return. RRSP’s and many other assets are taxable in that year and unless you have a spouse or dependent child the tax is due in the final(terminal) tax return. If you have large assets left In the RRIF category or similar plans it would place you in the very top tax bracket. For Ontario that gets as high as 53.35% and in Alberta 48%.

Risk of Spouse Pre-Deceasing- If you have a spouse you may be aware you can split income for income tax purposes from a RRIF after you reach age 65. The more money you make individually the more tax you pay so for many being able to split this income is huge. But what if your spouse does not live a traditional life span and passes away early. This can dramatically change the tax situation where not only the taxes are increased but also a loss of senior benefits due to clawbacks. 

Mandatory Withdrawals- You can’t defer tax forever on the RRIF as by age 72 your first mandatory withdrawal is due. On top of that, this money is invested and as it grows the larger the dollar amount required to withdraw by age 72. Another reason for this is the mandatory withdrawals are based on a percentage which increases the older you are. This can result in not only higher tax rates but clawbacks of your senior benefits such as the age credit and OAS benefit. The tough thing for a lot of retirees is these mandatory withdrawals may not even be needed for spending, but they are forced to take them out. 

Now here are some strategies of getting in front of the RRIF drawdown and withdrawing early at an optimized rate based on your circumstances. 

Reinvest in the TFSA for tax free growth- Withdrawing funds at lower tax rates prior to age 72 could be used for not only spending but for reinvestment. Plans such as the TFSA grow and pay out tax free as opposed to being taxable. This can allow more money to be accessible through retirement without tax or clawbacks. Almost more importantly, if there is money left over it is going to your beneficiaries rather than to taxation. 

Reinvest in a Non-Registered Account- Along a similar lines to the above strategy you can reinvest in non-registered funds. This is not quite as attractive because the growth is taxable but can produce tax preferred income like capital gains as well as dividends. 

Optimizing Income- Completing an optimized income strategy specific to your financial plan can provide long-term tax savings. It is not uncommon to add over $100,000 of wealth to a financial plan. I can’t stress this enough though, it is dependent on your financial plan on how this works. There is no one size fits all solution to this. Taking into account all of your assets, variables and retirement goals you can customize a strategy that fits. For many that could be to withdraw from the RRIF early while for others it does not. The key is to make sure you have a plan in place so you are not blindsided by the rules. 

Dan Beyaert CFP and Associate Portfolio Manager

Bellwether Family Wealth