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To withdraw early or maintain the status quo? That’s the question some retirees face when making a decision on their registered retirement income funds (RRIFs).
Some advisors recommend withdrawing from RRIFs earlier than the mandated age of 71 to increase a client’s income and tax efficiency. But Doug Chandler, Canadian retirement research actuary at the Society of Actuaries in Calgary, warns the situation is more nuanced and says, in many circumstances, accelerating RRIF withdrawals isn’t a great idea.
The FP Canada Research Foundation funded Mr. Chandler’s research assessing the value of early RRIF withdrawals. He spoke recently with Globe Advisor to discuss his findings.
What’s so wrong with accelerated RRIF withdrawals?
Advisors don’t know for certain what tax bracket the client will be in after retirement, whether it’ll be a lower or higher tax rate than they have today. Advisors also don’t know what the investment returns are going to be. And this is a different problem than a lot of other financial planning problems because Canada’s tax rates are not linear.
The highest tax brackets will be for people whose Old Age Security is clawed back. For them, it’s almost certain [accelerated withdrawals] are going to work out. But most people will be in the middle bracket, so the answer isn’t that clear. That’s where it becomes a matter of judgment, not computer simulation.
What parameters do you recommend advisors use?
They need to base projections on many scenarios. Ask if the client is more concerned about the size of the estate that goes to their beneficiaries or the risk of financial distress. If the client is more concerned about facing financial distress, then keeping the money in the RRIF longer will probably work out better.
In the long term, taxes on investment income tend to drag down the value of accelerated withdrawals. Even if accelerated withdrawals seem like a good idea for the size of the estate, it turns out to be risky in terms of the likelihood that you’ll run short of money in old age.
What kind of projections bother you?
I often see projections based on a single age of death. For example, your life expectancy is 87 and we’ll see what happens if you live to 87. If someone dies the year after they make the accelerated withdrawal, the accelerated strategy works out because they avoid paying the top marginal tax rate on the money they withdrew. There really was no investment that was earning income in the meantime because it was only a year. But the longer the person lives [past the projected age], the less likely it will be that things will work out.
This interview has been edited and condensed.
- Deanne Gage, Globe Advisor reporter
Must-reads from Globe Advisor this week
How career autonomy and mentorship drove Canada’s top woman advisor to excel
Not long after Shelly Appleton-Benko learned she ranked No. 1 on the list of Canada’s Top Women Wealth Advisors, she got a text from her nephew, who’s also a client, that highlighted why she achieved the honour. He congratulated Ms. Appleton-Benko, vice president, director and portfolio manager at Odlum Brown Ltd. in Vancouver, on her win and wrote: “One of the things that I love about you is that you don’t discriminate with wealth,” adding he “always felt valued.” Ms. Appleton-Benko says she aims to treat all of her clients like family, giving them the same advice and respect regardless of the size of their portfolio. Brenda Bouw explains the secrets of this top woman advisor’s success.
What the underused housing tax means for homes held in trusts, corporations and those used for vacations
With the federal government pushing back the filing deadline for the underused housing tax (UHT) to Oct. 31, some advisors are using the extension to identify and notify affected clients. The UHT targets primarily non-Canadian owners of Canadian residential property and those who own dormant houses. Those affected by the UHT will have to fork over a 1-per-cent tax per year based on the property’s current market value. “That’s a sizable amount of tax that you wouldn’t have had to pay before and it’s every year,” says Aaron Hector, private wealth advisor at CWB Wealth Management Ltd. in Calgary. Deanne Gage explains how the UHT process works.
Why this $1.75-billion money manager has a huge chunk of his portfolio in cash
Money manager Thane Stenner isn’t sugarcoating where he sees the economy heading and why a huge chunk of his portfolio is in cash right now. “We’re likely heading into a recession or will soon be in one … and it’s probably going to be a hard landing,” says Mr. Stenner, senior portfolio manager and senior wealth advisor with Stenner Wealth Partners+ at Canaccord Genuity Wealth Management Canada in Vancouver. “I’m not being bearish for the sake of being bearish, but this is one of those times at which I think things will get a bit worse than people anticipated.” Brenda Bouw asks him what he’s buying and selling.
How top women advisors manage to be successful while raising children
As one of Canada’s Top Women Wealth Advisors, Sophia Ito has built an accomplished career over the past 25 years with an entrepreneurial mindset and passion for her work. But as a mom in the wealth management industry, the journey to success has not been a linear one. Ms. Ito and other women advisors working in top wealth management roles while parenting younger children are in select company in the industry. At the moment, only 15 to 20 per cent of financial advisors in Canada are women, according to a recent Sun Life Global Investments report. Still, among the 100 advisors listed in the inaugural ranking, almost half have children under 18. Helen Burnett-Nichols reports on how these women advisors managed work and family.
How Bill C-228′s protection of DB pension plans affects financial planning
Record buyback spree attracts shareholder complaints
Meteoric rise in power of ‘finfluencers’ sparks concerns
Clearing up the biggest misconception about philanthropy can encourage more Canadians to give back
Retail giants Walmart and Home Depot to release Q1 results in this week’s Advisor Lookahead
What you and your clients need to know
Four things to consider when transferring the cottage to the kids
If you’re going to transfer the cottage during your lifetime, be aware that doing this improperly can cause a double tax problem. Suppose you own a cottage worth $700,000 with an adjusted cost base of $300,000. There are different ways to transfer the property to the kids. Some would prefer to sell the cottage to them for an amount below fair market value. Tim Cestnick outlines some strategies that may work for families.
Are Wealthsimple accounts offering $300,000 in deposit insurance, rates up to 4 per cent worth it?
Starting this week, Wealthsimple Inc. has something for the many people stockpiling cash. Up to $300,000 can now be parked in the Wealthsimple Cash account with deposit insurance for the full amount and an interest rate as high as 4 per cent. It’s a unique offer aimed directly at people who have been shuffling money around between banks to stay within deposit insurance limits and maximize interest. Rob Carrick explains how this strategy is aimed at an older crowd by a company that has traditionally aimed at a younger clientele.
Property insurers warn proposed federal tax change to preferred shares could hurt the sector
Intact Financial Corp. says a proposed tax measure in this year’s federal budget would likely have negative consequences for insurers, their customers, and companies seeking to raise money in the capital markets. The federal government’s March budget proposed an amendment to the tax treatment of share dividends that banks and insurers receive from Canadian companies. Currently, dividends received from shares of a Canadian company, including both common and preferred shares, are tax-exempt. Now, Ottawa wants financial institutions to record those dividends as business income. Clare O’Hara reports on the changes.
Emerge Canada tells investors it will wind up or sell operations after OSC order
Asset manager Emerge Canada Inc. says it’s in the process of finalizing a plan to wind up or sell its Toronto-based business after a suspension of its registration last week. The Ontario Securities Commission suspended the exchange-traded funds provider from being an investment fund manager, a portfolio manager and an exempt-market dealer after finding the company failed to comply with working capital requirements. Clare O’Hara explains what this means for investors.
– Globe Advisor Staff