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Protect your retirement money.

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Question:

Given the taxation on ultimate RRSP/RRIF savings upon their withdrawal, does it make sense to start taking money out of one's RRSP gradually as soon as one retires - well before age 71 -and putting that money into a TFSA? That way you would only pay tax on a lower amount withdrawn early from an RRSP, and let it grow in a tax-free savings account rather than a taxable RRSP.

For example, I am now 70 and at 71 must convert to an RRIF and start taxable withdrawals, which means I will be losing a significant amount of my savings to taxes, especially if I already have a substantial pension and am in a higher tax bracket.

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Allan Speevak

Answer:

Allan, RRSPs were designed to provide a retirement income to you and your spouse. The government gives you a deduction on your current taxes and allows the RRSP account to grow on a tax-deferred basis until you withdraw the funds. The theory is that you will make RRSP contributions at a high tax bracket when working and withdraw the funds at the same or lower tax bracket when you retire.

However, if your income is going to fall into a higher tax bracket in the future or if your income will be so high that you run the risk of losing government benefits (such as the OAS clawback) it does make sense to withdraw some of your registered funds before you might need them.

In your example, when you turn 72 and need to start taking an income from your registered funds (RRIF) and if this additional income will put you in a higher tax bracket or raises the possibility of your OAS being clawed back, then it makes sense to withdraw these funds early and put them in a TFSA. It even makes sense to make this withdrawal if you do not have any TFSA room left.

If, however, you are going to be in the same tax bracket and your OAS will not be clawed back when you turn 72, then you should just leave your funds in the RRIF. If you have the choice of paying tax today or paying tax tomorrow you should always chose to pay it later.

Clay Gillespie, a certified financial planner and chartered investment manager, is a financial adviser and managing director at Rogers Group Financial in Vancouver. The views expressed are those of the author and not necessarily those of Rogers Group Financial, which makes no representations as to their completeness or accuracy.

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