At 64, I am a man receiving $1,650 per month in dividends from my RRSP through mutual funds worth $115,000. I am very pleased and I am only withdrawing the monthly dividend at this time.
So I have seven years to draw down before converting it to an RRIF.
I was thinking of taking out some of this - say $115,000 divided by seven years, therefore $16,420 per year - and then pay the taxes and then reinvest this money back into the same mutual fund in a non-registered account to enjoy the growth again.
What taxes will I have to pay on this money now as it grows? Thank you, Paul
(Note: Paul later wrote in to clarify that his holding was a global monthly income mutual fund, not an ETF, from a major Canadian bank. These funds often pay out return of capital, which results in very high yields even when the underlying securities don't perform particularly well. Distributions on some of these funds are also being cut in the near future. For more on these funds, see here and here.)
The taxes on the funds once you have withdrawn them depend on the type of investments you purchase with those funds. If they pay a dividend from a Canadian company, you will get a dividend tax credit that reduces the tax payable on the dividend, based on your income.
Similarly, this applies to capital gains. For interest you will pay your tax rate on 100 per cent of the interest income.
You should also consider transferring as much as you can to a TFSA. If you haven’t contributed in the past, you can now deposit $25,500.
Note that you could withdraw "in kind" or in the form of your current investments and have them transferred to a non-registered account. You would have to have available cash to cover the de-registration withholding tax. This could save you the transaction costs of selling and re-buying the same investment.
There is the school of thought that you are tax-sheltering equity growth within a RIF and in the long run the tax sheltering could yield a better result. It is dependent on a number of factors such as when you pass away, will the assets pass on to a spouse or become de-registered. The major difference between the RSP and a RIF is the mandatory amount that you would have to withdraw each year. This can put you into a higher tax bracket, (mind you, you are only taxed at the higher rate for each dollar above the last one) and could cause a claw back of OAS. It all depends on the total of assets in the RIF.
I hope this helps.
Nancy Woods is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. You can send your questions to email@example.com