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Email this6:51 am
October 27, 2013
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Alexandre said
AltaRed said
It is always better to have more income than not to have it, even if some of it is taxed, or social benefits are subject to clawback.I suspect many financial tax advisors would disagree. Generally speaking, if someone can defer income they currently don't need in order to get more in social benefits and/or pay less income tax - that would be valid tax strategy, would not it?
This individual is already collecting CPP and OAS so is at least 65 years of age, has a small corporate pension and a boatload of money in GICs and in an RRSP. The individual is fretting about getting more income than he has spending needs for. To quote the original post.....
He has pile of money in GIC - what I would call 'live' money.
And he has a pile of money in RRSP.
Plus OAS, CPP and little corporate non indexed pension (~10k/year).He is telling me there is no way he can use all RRSP/RIFF due to lifestyle he lives. Frugal, does not need Anything as he has everything he needs (furniture, house, etc.).
Biggest headache is GIC as they generate nice interest he can live off as he lives now.Should he stop doing GIC and put money in no interest account? Keeping it in the shoebox is not a solution as if he decides to put money back into banking system one day somebody might ask 'where all those moneys are coming from???'
Why would this individual want to place funds in a no interest bank account to decrease both gross and after-tax income? More income is always better even if some of it is taxed and 15 cents on the dollar might be clawed back in his OAS. He still ends up with more money in his jeans post post/clawback no matter how much additional income he makes.
We do not know enough specifics to know whether he is currently in OAS claw back territory or not but if he is, or is on the verge of it, the only thing he could consider is not converting to RRIF now and grab more OAS now before the RRSP is transferred to a RRIF and far more OAS is clawed back later.....AND he may be in a higher marginal tax bracket once RRIF withdrawals start to occur. We do not know what that balance between receiving more OAS now vs higher MTR post-71 and more taxes later. Said another way, trying to avoid OAS claw back now, which is only 15 cents on the dollar, may be far less productive than being in a higher MTR later.
The real point here is too much income is never a bad thing. Having $150k of taxable income is far better than having $80k taxable income because one will always end up with more after tax income no matter what the tax burden is. If having all that extra cash bothers this individual, there are plenty of gifting opportunities to relieve him of that burden. Half of the individuals on this site would be glad to help him dispose of that excess burden.
Added: I still have difficulty believing the original post is for real. If it is, the individual is ridiculously focused on taxes being paid rather than how much additional (incremental) money ends up in his pocket. If that is a burden to him, there are many, many worthwhile gifting and charitable causes to give too.
7:16 am
November 8, 2018
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I am not sure you realized this, but with your long post discussing different financial scenario you proved my point that one should not talk in absolutes when giving financial advice to strangers.
It is always better to have more income than not to have it, even if some of it is taxed, or social benefits are subject to clawback.
Not always. There are cases when deferring income one does not currently need makes more financial sense.
I don't know why I have to be Capt. Obvious in our conversation, but here we are.
7:17 am
September 11, 2013
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There's obviously a psychological component to our dealings with money. I've seen a few people do similar, I believe to virtue signal to themselves and others that they are not in the "greedy" group of humans, that they "above" getting more money than they need.
I once knew someone that used to keep hundreds of thousands in a chequing account and (tellingly) made sure people knew of it and of her disdain for excess wealth. Takes all kinds.
8:54 am
October 27, 2013
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Alexandre said
I am not sure you realized this, but with your long post discussing different financial scenario you proved my point that one should not talk in absolutes when giving financial advice to strangers.It is always better to have more income than not to have it, even if some of it is taxed, or social benefits are subject to clawback.
Not always. There are cases when deferring income one does not currently need makes more financial sense.
I don't know why I have to be Capt. Obvious in our conversation, but here we are.
Except the OP was considering GIC interest as a headache (non-registered account) and had no need for RRSP/RRIF income at this time. Why would one forego GIC interest (the suggestion to put it all in a chequing account) when regardless of the amount of taxes, the individual will always end up with more after tax cash? This is not a deferral of income....it is a permanent loss of income with money doing nothing.
Why not have $50k in GIC interest annually rather than $0 interest, or why not have $50k in annual GIC interest rather than $25k in HISA interest? It seems to me it is always better to have more before tax income each year than less because that means will always be more after tax income regardless of taxes.
To my reollection, The OP never once discussed deferral, as in keeping the RRSP intact for now.
Added: True story: Some 40-50 years ago I had a father-in-law (and his spouse) who sold their family farm and retired in a small town. He had put all their sales proceeds, net of what they spent on their house in town, in the bank. What I didn't know until mother-in-law enlisted my help one day was she wanted me to convince him that their money would make far more income if it was in GICs rather than a passbook savings account. It turns out ALL their money was in that freaking passbook account.
So I tried showing FIL the math of how much more money they would have each year with GICs. He stubbornly refused to consider it because he would be paying more tax.... that despite about 80 cents (or thereabouts) of each incremental dollar in interest would remain in his account. He said their lifestyle didn't need additional after tax income. No amount of math would change his mind regardless of the pictures I drew. I so much as told him he was beyond help. His wife agreed. YCFS.
9:53 am
November 18, 2017
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Let's try to keep things civil and not resort to name-calling like "turdo," okay?
RetirEd
10:08 am
December 12, 2009
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RetirEd said
Let's try to keep things civil and not resort to name-calling like "turdo," okay?
I think you misunderstood the post. Turdo was capitalized and was not in reference to either forum user or even any one individual in particular. I don't really see the need, but it's completely benign.
Cheers,
Doug
10:11 am
December 12, 2009
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Bill said
AltaRed, I get it, I'm just saying I'm not interested in being in a situation where my "expressed expectation" is not met, that would bug me and I don't want to be bugged, even for a minute.
What's your "expressed expectation"? Perhaps that's the problem.
I would also note that one is going to have a lot more frustrations from their expectations not being met the more one leaves (i.e., pays in taxes) to the federal government that fritters it away like water. Although, I guess one would typically be dead at that point, so the worrying ceases... 
You could always go the ultra conservative route in terms of charities with the lowest cost structures and simplest missions, by leaving cash, investments, or land to any number of land conservancies and trusts across Canada.
Cheers,
Doug
11:53 am
September 11, 2013
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Doug, in my case my expressed expectation is that every dollar given is used in a way my spouse and I deem wise. Because we realize that's unlikely we don't give any, there's no problem at all.
Your point about not being around to see how your money ends up being used is bang on.
2:49 pm
January 25, 2024
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So many good replies!
Again, my first post is real and true. Money in RRSP is about 700K. NO WAY it could be all spend in retirement after 71.
That is why idea to convert it into RIFF and Force withdrawal before 71 is suggested.
OAS is not kicked in yet and I doubt it will clawed back after 65 as he will NOT have NET income >80K (after tax, correct? 'net' means 'after tax'?).
At 65 OAS+CPP+pension should be about $30k. RIFF ~30K, GIC interest ~35K.
Just for fun I put that total number (as T5) into TurboTax and it shows ~20K in taxes.
So you guys still think it is better to pay 20K in taxes, have 70K in cash left than being miser, living on dog food and buying only reduced produce at grocery?
3:23 pm
October 27, 2013
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Net income is before deductions to get to taxable income upon which taxes are calculated. https://www.canada.ca/content/dam/cra-arc/serv-info/tax/cvitp/cvtip-how-tax-is-calculated-en.pdf
Need to separate income from spend. Those are two different things. One could have $80k of income but only want/need to spend $60k. Just means the surplus is re-invested.
Total income of $80k from pensions, T5s, etc. (i.e. fully taxed income) with no income splitting likely results in under $16k of income taxes (Ontario)
4:24 pm
September 11, 2013
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CAD, net income is comprised of amounts before taxes, e.g. if gross income is $100 and $20 tax is deducted before you get your $80 cheque then net income on your return is the $100, assuming no other deductions apply.
4:46 pm
October 21, 2013
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I find the story credible; there are just a few things missing, and perhaps it could have been phrased differently. It took me a while to come to this conclusion.
Ending up with more money than you expected or ever had before can be stressful; it introduces a whole new set of decision-making and money management problems which you didn't anticipate. At a deeper level it may unleash regrets about previous spending and saving etc.
I also find AltaRed's story about ex-father-in-law quite credible. A lot of people are irrational in their view of taxation; some are active on this forum. This is a long-standing problem. They really don't want to pay any taxes at all and will howl no matter how low they are, going to great lengths to try to eliminate them. And some will indeed, as the saying goes, "cut off their noses to spite their faces".
5:55 pm
October 21, 2013
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CAD said
So many good replies!Again, my first post is real and true. Money in RRSP is about 700K. NO WAY it could be all spend in retirement after 71.
That is why idea to convert it into RIFF and Force withdrawal before 71 is suggested.
OAS is not kicked in yet and I doubt it will clawed back after 65 as he will NOT have NET income >80K (after tax, correct? 'net' means 'after tax'?).
At 65 OAS+CPP+pension should be about $30k. RIFF ~30K, GIC interest ~35K.
Just for fun I put that total number (as T5) into TurboTax and it shows ~20K in taxes.So you guys still think it is better to pay 20K in taxes, have 70K in cash left than being miser, living on dog food and buying only reduced produce at grocery?
These figures are important, and advice is useless without them.
We also need yo know:
how old is he now?
how old is wife?
how long married or common law?
Does wife have any income or separate savings? if so, how much and in what form?
Depending on the answers, there could be significant tax savings.
But I am not clear on his actual goal. Is it to have less money to worry about or to reduce taxes? These seem contradictory.
7:08 pm
December 12, 2009
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CAD said
So many good replies!Again, my first post is real and true. Money in RRSP is about 700K. NO WAY it could be all spend in retirement after 71.
That is why idea to convert it into RIFF and Force withdrawal before 71 is suggested.
OAS is not kicked in yet and I doubt it will clawed back after 65 as he will NOT have NET income >80K (after tax, correct? 'net' means 'after tax'?).
At 65 OAS+CPP+pension should be about $30k. RIFF ~30K, GIC interest ~35K.
Just for fun I put that total number (as T5) into TurboTax and it shows ~20K in taxes.So you guys still think it is better to pay 20K in taxes, have 70K in cash left than being miser, living on dog food and buying only reduced produce at grocery?
Who cares about the OAS clawback? My dad had that for the first two years after retiring, due to him having worked most of the year. Not a big deal, really.
Also, I highly doubt your friend will be living on dog or cat food with $70,000 in after tax income. If they are, then they really need personal finance lessons. I purchased a studio condo recently and expect my all-in housing costs at well under $7,000 per year. (Still waiting on a reply to that thread!) Add in $3,500 for groceries (on the high side, if I'm being honest), and I foresee being able to live on $15,000 per year comfortably, not including any trips one may take. Note this is primarily a vegan lifestyle. And, I recognize this is thanks to a fully paid shelter, although it sounds like that's also the case for your friend, too.
Cheers,
Doug
4:50 am
November 8, 2018
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CAD said
Money in RRSP is about 700K.
At 65 OAS+CPP+pension should be about $30k. RIFF ~30K, GIC interest ~35K.
Just for fun I put that total number (as T5) into TurboTax and it shows ~20K in taxes.So you guys still think it is better to pay 20K in taxes, have 70K in cash left?
OK, so his income is above GIS threshold and below OAS clawback. We will ignore these, then.
He has an option to convert RRSP to RRIF now and force mandatory annual withdrawal, as friendly banker recommended, or delay to 71 and supplement budget shortfall (if any) from Savings.
I suggest you propose him two following scenario for his consideration:
1. RRSP converted to RRIF at 65 or sooner
At 65 OAS+CPP+pension should be about $30k. RIFF ~30K, GIC interest ~35K.
Annual tax bill: ~20K.
2. RRSP kept till 71
At 65 OAS+CPP+pension should be about $30k. No RRSP/RRIF withdrawals. GIC interest ~35K.
Annual tax bill: ~12K.
------------------------------------
Which means, he is either going to pay extra $8K annually in taxes now, or defer that for later.
If he wants to defer RRSP/RRIF withdrawal taxes for later, in 6 years between his 65 and 71 he will pay about ~50K less in taxes.
6:04 am
March 30, 2017
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Alexandre said
OK, so his income is above GIS threshold and below OAS clawback. We will ignore these, then.
He has an option to convert RRSP to RRIF now and force mandatory annual withdrawal, as friendly banker recommended, or delay to 71 and supplement budget shortfall (if any) from Savings.
I suggest you propose him two following scenario for his consideration:
1. RRSP converted to RRIF at 65 or sooner
At 65 OAS+CPP+pension should be about $30k. RIFF ~30K, GIC interest ~35K.
Annual tax bill: ~20K.
2. RRSP kept till 71
At 65 OAS+CPP+pension should be about $30k. No RRSP/RRIF withdrawals. GIC interest ~35K.
Annual tax bill: ~12K.
------------------------------------
Which means, he is either going to pay extra $8K annually in taxes now, or defer that for later.
If he wants to defer RRSP/RRIF withdrawal taxes for later, in 6 years between his 65 and 71 he will pay about ~50K less in taxes.
Thats the thing, the tax code is structured that CRA will get u sooner or later, no where to hide. RRSP, RRIF only really benefits those that dont have much savings outside of the registered plan, but then thats the majority may be.
Just learn to feel good that one is lucky enuf to be well off to pay $$$ tax even after retirement. It really is. This way one will feel a lot happier.
7:23 am
October 27, 2013
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The example in post #55 works provided the PV of tax deferral of back loaded taxes is approximately equal, e.g. does not trigger a higher MTR post-71 with the higher RRIF income added, provided the individual(s) do not die prematurely (early), provided tax policy does not change for the worse.
Whether to wait or not is discussed in financial forums on a regular basis and there is often no clear, or 'best' answer, as it depends on the trigger points in income calculations, how one wishes to live their lifestyle, what 'bets' one wishes to take in the range of variables, etc.
Tax deferral usually wins the day from a straight taxation perspective but that is only one perspective. Either way, any solution is better than not receiving income putting all those maturing GICs in a non-interest bearing account.
7:42 am
November 8, 2018
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savemoresaveoften said
Thats the thing, the tax code is structured that CRA will get u sooner or later, no where to hide.
True. Except if tax code changes with time, or income changes.
I am in similar situation as that old friend, in sources of my income. I will go with option 2, because I am in charge of RRSP withdrawals till 71.
Option 2 does not necessarily mean RRSP funds should not be withdrawn, it means they do not have to.
Suppose in few years interest rates double, just because of stubborn inflation. Then, with RRIF, Option 1 becomes $120K income. Could trigger higher marginal tax rate and OAS clawback.
With RRSP, he could just not withdraw anything that year and his income will be about $95K.
An opposite may happen: interest rates plummet to almost zero, let's say GIC interest income becomes $5K, total income before RRSP/RRIF withdrawal is $35K.
RRIF forces to take another $30K minimum. With RRSP it is any amount, from $0. Perhaps, only $15K will be enough to withdraw from RRSP. Perhaps, he takes nothing at all, covers budget shortfall from savings, and in joint filing with wife triggers GIS benefit.
---------------
Then, there is tax code. A political party in power may decide to invest in labor, sets flat personal income tax rate at 10% to attract talent. You'll be happy you waited with RRSP/RRIF withdrawals before that.
Even minor changes such as basic exemption increase at or above inflation could change an outcome of total taxes over person's lifetime.
What if one day income equivalent to minimum salary will be exempt from taxation, that would be $33K in Ontario at current minimum hourly rate. Makes sense to delay RRSP/RRIF withdrawals till then.
8:13 am
March 14, 2023
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Alexandre said
I am in similar situation as that old friend, in sources of my income. I will go with option 2, because I am in charge of RRSP withdrawals till 71.
Option 2 does not necessarily mean RRSP funds should not be withdrawn, it means they do not have to.
You might want to consider converting some RRSP to RRIF before age 71 to take advantage of the $2,000/year pension tax credit and/or splitting opportunities. You'd still be in charge of withdrawals from the rest of the RRSP.
Please write your comments in the forum.