Dear Nancy Woods:
I expect to have too much money in my RRSP by the end of the year for when I turn 71, when this will go to a RRIF. The minimum RRIF withdrawal percentages required by the government are high...to the point that I'll have my OAS clawed back.
Is there any safe way to take money out of an RRSP without being clobbered by the tax man? I imagine that this would require some means of reducing income, such as by buying flow through shares. (I thought of making RSP withdrawals over the five years left until I reach 71, but some OAS would be clawed back now if I do that.) Do you have any ideas? Bill
There is not a tax-free way to de-register funds from a registered savings plan or a registered income funds account. These plans were set up to be a tax-deferral strategy, not a tax elimination plan. The tax-free savings account is the best tax elimination account, so make sure you maximize the contribution amount for it each year.
You are correct with the strategy of withdrawing, say $25,000, from your RSP and purchasing an equal amount of a flow-through limited partnership to create a tax neutral event. The risk is what will be the future value of the flow-through shares when they roll over to the mutual fund units from the limited partnership. In order for the exercise to have been worthwhile, the value of the mutual fund units needs to be the amount of your withdrawal less your tax rate if it was taxed as straight income. If it is not, you would have to wait to sell those units or roll to a more suitable investment fund within the fund company.
It is, however, possible and it's a strategy that I have used for certain situations where suitable. Without further details, I cannot say specifically that it is a suitable strategy for you.
Once your net income is over $114,640, all of the OAS is clawed back, but only for the following year. Once your income drops down, the Old Age Security payment will be adjusted according to whatever your previous year's income level was.
So, the claw back will be only temporary. If you are really looking to diminish your RRSP, it may be worth the sacrifice for the couple of years.
Do you have a spouse with little or low income? If so, flow the de-registered RSP funds through a RIF to classify them as pension income and income split with her.
Before you implement any strategy, seek professional tax or financial planning advice.
Nancy Woods is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. You can send your questions to firstname.lastname@example.org