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investor clinic

Jim Yih calls it “grumpy-retiree syndrome."

Folks scrimp and save all their lives and sock money away in a registered retirement savings plan. But when the time comes to start pulling money out of their RRSP – and paying tax on the withdrawals – they resist.

“When people develop grumpy-retiree syndrome, their sole purpose in life is to screw the government, and the way you do that is you don’t take any money out of your RRSP because you don’t want the government to get their grubby hands on your money,” says Mr. Yih, a financial educator and founder of

For others, the reluctance to make withdrawals arises because they fear running out of money and hate depleting their capital.

“So they defer, defer, defer and 71 comes along and now they are forced to take some money out, and then they take out as little as possible and ultimately they die with too much money [in their RRSP]. It happens all the time,” he says.

The problem with taking a large RRSP to your grave is that it can trigger a hefty tax bill. Generally, the value of the RRSP (which must be converted to a registered retirement income fund or RRIF by Dec. 31 of the year the person turns 71) is included on the deceased person’s final income-tax return. For an RRSP or RRIF well into the hundreds of thousands of dollars, a chunk of the plan’s value could be taxed at the highest marginal rate. In Ontario, for example, income above $220,000 is taxed at 53.53 per cent.

The tax hit can be postponed if the RRIF is left to a surviving spouse or common-law partner, who can roll the proceeds into his or her own registered account. But when the surviving spouse or partner dies, the combined RRIF then becomes taxable. (There are circumstances, such as when the RRSP or RRIF is left to a financially dependent child or grandchild, in which the tax on the holder’s death can be avoided.)

The solution, Mr. Yih says, is to develop an RRSP or RRIF withdrawal strategy as soon as the person retires, taking into account the individual’s projected income from all sources. For some retirees, it could be advantageous to start withdrawals sooner than the year after they turn 71, which is when mandatory minimum RRIF withdrawals kick in.

Say, for example, a person retires at 60 but doesn’t plan to collect Canada Pension Plan or employer pension benefits until the age of 65. That could create a five-year window where income is lower and RRSP or RRIF withdrawals would be taxed at a favourable rate, he says.

Another reason to consider early withdrawals is the opportunity for income-splitting. At 65, RRIF (but not RRSP) withdrawals qualify as pension income and can be split with a spouse or partner to lower the couple’s tax bill. Similarly, individuals without a pension plan should consider withdrawing $2,000 annually from their RRIF starting at 65 to maximize the pension income tax credit, Mr. Yih says.

Determining an optimal withdrawal strategy is a complex process that involves not only a person’s expected marginal tax rate, but the impact of withdrawals on income-tested benefits such as Old Age Security and the age amount tax credit. The loss of tax-free compounding inside the RRSP or RRIF also has to be weighed against the advantages of taking money out early, says Jamie Golombek, managing director of tax and estate planning at Canadian Imperial Bank of Commerce.

For early withdrawals to be advantageous, the individual would typically have to be in or near the lowest marginal tax bracket, Mr. Golombek says. In Ontario, the lowest marginal rate of 20.05 per cent applies for income up to $43,906.

“But for someone who is in a relatively high tax bracket, like if you’re already in OAS clawback range [which starts at income of $77,580 for 2019], then does it makes sense to take money out of the RRSP so you save a few per cent in tax? Probably not,” he says. In that case, the individual could be sacrificing decades of tax-deferred growth inside the RRSP or RRIF that would likely outweigh the benefit of taking the money out early at a lower rate than upon death.

“Each situation needs to be looked at carefully, hopefully with some kind of financial modelling," Mr. Golombek says.

Dorothy Kelt, founder of, agrees that early withdrawals are most appropriate for low-income earners. “If the holder of a RRIF is in the lowest tax bracket, it may be wise to maximize withdrawals but keep the taxpayer in the lowest tax bracket,” she says. “This isn’t an easy call to make, and of course depends on the person’s complete personal and financial situation.”

Avoiding death isn’t an option. But drawing up an RRSP or RRIF withdrawal strategy so you don’t leave the taxman more money than necessary is just good financial planning.

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