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Older friend's dilemma (how to spend money!)
April 21, 2024
11:20 am
Doug
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RetirEd said
Doug: "Turdo" was indeed aimed at a particular individual. Just because they're not on this board doesn't mean we need to resort to epithets like "Cinnamon Hitler."  

I don't even know what "Turdo" even means.

April 22, 2024
12:22 am
RetirEd
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It's an infantile abuse of the PM's name.

RetirEd

April 22, 2024
5:53 am
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Post #55. Thank you Alexandre for your comments.

I understand you want to minimize taxes. But friend wants to empty RRSP/RIFF before he dies otherwise nobody but government will benefit of it.
Money in GIC (cash) can be spend, used at any time, donated, given away, etc. Only interest on existing cash is taxed.

-------------------
We also need to know:
1. how old is he now?
2. how old is wife?
3. how long married or common law?
4. 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.
-------------------

1. 64 this year
2. 63 this year
3. 33 years
4. RRSP ~300k, mutual fund, Mawer

My apologies for ‘turdo’. Please stop discussing that as some seems to be offended. If you think hard you would know who I am talking about. But that is just my opinion.

April 22, 2024
4:40 pm
Bill
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Friend plans to empty RRSP/RRIF while alive because he thinks that will result in less tax than if it's taxed on death, is what I'm understanding. How does he plan to draw it down without gov't getting benefit of taxes on that RRSP/RRIF withdrawal income?

April 24, 2024
1:12 am
Loonie
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Thanks for the extra info, CAD.

I think your friend is going to need to ask an accountant or financial planner (professional) to run some numbers for him in order to see what is possible and what is best.

If wife's only income is from RSP (and presumably OAS, CPP), he can consider income sharing (CPP) and income splitting (RIF, work pension). CPP needs to be done when the second of you applies for it, presumably when she is 65. Pension splitting operates quite differently and I think it can start when both are 65+, but it's been a few year since I dealt with this so I may not remember correctly on that.

You should read up on these before asking for a professional opinion. Info from government is on internet.

The reason for doing this would be to reduce his taxable income by attributing some to wife. This opens up increased room for him to make voluntary RIF /RSP withdrawals, and helps to deplete that 700K.

HOWEVER, I am not sure to what extent this will help in his case because of other factors, and that's why he needs a pro to run numbers.
The primary consideration would be that he needs to watch out for impact on OAS clawback. Even if he doesn't make any additional RIF withdrawals, he will be hovering around the threshold for OAS clawbacks. If he divides income with wife, she will lose more of the "Age amount' tax credit which isn't as severe as OAS clawback.

Any such losses will be on an annual basis, whereas leaving a chunk in the RIF until death is not subject to this annual loss, so could potentially come out ahead or about the same, except that if you take the cash out, you can do something with it while alive.

I can say from personal experience that it takes longer to whittle down these RIFs than you may imagine. It's very possible he would not get rid of it while alive unless prepared to accept OAS clawback. But, if you do that, are you really any further ahead? Maybe not.

It's not reasonable to expect the banker to do these calculations accurately; it's not really their area.

The bottom line is that all the RSP/RIF money is ultimately going to be fully taxable. The only thing you do is rearrange it. You paid no tax on the income you put into it in the first place, and it has grown, so now you pay.

Threshold for OAS clawback is currently about 91K per person.

I have a couple of other ideas about how to approach charitable giving in larger amounts if interested. These could be useful if the goal is truly to divest. However, I think friend needs to be careful about letting go of too much too soon. People often don't realize how much health care is going to cost them out of their own pocket until it happens to them. It can be horrendous, and it will only get worse the way things are going.

April 24, 2024
8:04 am
AltaRed
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Many wise words from Loonie. A few supporting comments.....

To the extent there is disproportionate income between the spouses, CPP equalization once CPP starts for both, and pension income splitting (RRIF, DB) once both are 65+ using good tax software that iterates and optimizes for the best split is almost always the optimum solution. Good software takes into account things like the pension income credit, age credit, medical deduction, etc.

It is almost always a good thing to have enough qualifying pension income to take advantage of the $2k pension income credit (both individuals) at age 65. That is tax free money.

It is almost never a bad thing to defer taxes in whole or in part from registered accounts as long as possible. RRIFmetic software (no longer workable due to the death of the founder Steve Salter), VPW withdrawal spreadsheet, etc will almost always result in the present value of deferral being better, regardless of absolute value of taxes eventually paid, which is an unknown anyway due to the variable returns of one's investments, date of death, etc.

Reserving a good chunk of the portfolio to pay for potential health needs late in life is something everyone should plan for. If it is not used due to dying healthy and/or early, and there is a lump sum that gets taxed, so be it.

If the OP's friend is not software savvy enough to run spreadsheets such as VPW, I fully agree it is worth paying a financial planner to run a number of 'what if' scenarios for various situations. It is more important to focus on net cash flow received from such models under the various scenarios than to get torqued up about taxes paid.

April 24, 2024
9:30 am
Bill
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I've seen a couple of instances where very old folks were able to pay someone to come into the house and help them with daily tasks, avoid having to move out into care institution. One is wealthy enough to have a young lady live with them 24/7, closely overseen by nearby daughters of the old folks, so that's a very nice option for them because they have the dough for it. So you never know how you might find uses for your money some day.

April 24, 2024
8:05 pm
Loonie
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I was thinking further about this situation.

Assuming this couple is now retired or earning little, it would probably be wise for them to apply for CPP now, and ask for pension sharing. CPP pension sharing has an advantage as a first step because it doesn't increase his taxable income, and will almost certainly reduce it. He can then choose to top it up with RIF funds annually.

The problem then becomes how much to top it up.

I think there are basically 3 choices:
1. Top up only as far as OAS clawback threshold.
2. Don't worry about OAS threshold; take out more money, amount to be influenced by marginal tax rates.
3. Take out enough that you can split some of it (up to half) with wife's income, but this will likely put him into or close to OAS clawback, at least by age 72.

Whether or not he chooses to gradually empty the RIF, the taxes will be significant, but marginal rate and clawback can be controlled to some extent.

Some people have found, after running the numbers, that they would do better to take the hit on the clawback and empty their RIF within a limited number of years. Calculating this really requires a good financial planner but could be worthwhile. Once it's done, there are no more clawbacks due to it. It has one important advantage over letting it dribble away in mandatory withdrawals, leaving a large sum still intact at death to be taxed at over 50%, namely that you do get cash out of it and accessible to do with as you wish during your lifetime. None of the money sitting in your RIF at death of both of you will ever be any use to either.

April 24, 2024
8:34 pm
AltaRed
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Loonie said
None of the money sitting in your RIF at death of both of you will ever be any use to either.  

I believe far too many people worry about taxes upon death. It is important to understand what the impacts could be in order to potentially mitigate some of it when and if practical, but to potentially compromise one's enjoyment of retirement life with one's own assets due to taxes upon death is a classic tale of the tax tail wagging the dog. My beneficiaries will get what they get when I go out boots first, taxes be damned.

April 25, 2024
6:39 am
Bill
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Just different priorities, I'm not one of them either but to some folks it's a priority to leave max dough to beneficiaries. I can understand it if you aren't denying yourself anything, maybe your retirement needs and wants are fully met and one of your remaining pleasures is thinking you'll be remembered more fondly thanks to your bequests.

Though I do think the financial industry kinda pushes the idea too, just like they push a lot of ideas that results in them managing pools of money for long periods of time.

April 25, 2024
1:04 pm
Loonie
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I'm not trying to suggest what this person ought to have as a goal. I'm just suggesting options and how to assess the outcomes. The rest is up to him.

The financial industry puts a lot more emphasis on encouraging you to contribute to
RSPs than on explaining the range of long term outcomes. Then, later, when people find out, they are angry at the government, but the rules have never fundamentally changed.

For spouse and I, it makes good sense to whittle down our RIFs with extra withdrawals, but we have particular circumstances, and one of those is probably uncommon. I stopped contributing when I realized what the outcome would be.

My RIF will be all gone this year, thank goodness, and I will be 77. It has taken longer than I thought it would, but glad to be rid of it.

April 25, 2024
4:33 pm
Saver-Mom
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Why glad to be rid of it, Loonie?
Is it not better to keep funds longer in registered account to avoid taxes on interest?

April 25, 2024
6:15 pm
canadian.100
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Saver-Mom said
Why glad to be rid of it, Loonie?
Is it not better to keep funds longer in registered account to avoid taxes on interest?  

One does not avoid taxes - rather I think one is postponing or delaying taxes - however, I think the RIF is still useful as a source of income if one lives a long life and can draw down on it gradually.
Perhaps if one has pensions and significant non registered investments generating sufficient income, the RIF may not be as important for that person - and ultimately the RIF will be fully taxed on the owner's death. No doubt tax rates will keep increasing.

April 27, 2024
2:10 pm
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So many good advices and fruitful discussion! I really appreciate it and everything is passed to my friend (who does not like computers very much and refuses to open an account here and get involved).

Here is another trick question: what if he does not take CPP & OAS at 65 but keeps taking money from RRIF until it is almost empty?
Can OAS & CPP be taken at any random year after 65? At 68? At 73? etc.?
Will this be a smart move? Or dumb one (take government money no matter taxes)?

April 27, 2024
3:22 pm
Norman1
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CPP can be started at any month between age 60 and age 70:

Should you wait to start collecting CPP

Your age affects your pension amount:

  • If you start before age 65, payments will decrease by 0.6% each month (or by 7.2% per year), up to a maximum reduction of 36% if you start at age 60
  • If you start after age 65, payments will increase by 0.7% each month (or by 8.4% per year), up to a maximum increase of 42% if you start at age 70 (or after).

Consider your personal circumstances

There are many factors you should consider when deciding when to start receiving your CPP retirement pension. These include your health, your financial situation, and your plans for retirement.

For example, if you’re healthy, expect to live a long life, or have access to other sources of income, you may choose to start receiving your CPP retirement pension later. This will result in a larger monthly pension, which could help protect you from outliving your savings.

However, if you’d prefer to work less, or you want the money now to pay off debts or to fund your retirement plans, you may choose to start receiving your pension before age 65. This will result in a smaller monthly payment which can help meet immediate needs, especially if you have little or no other income.

April 27, 2024
3:27 pm
Bill
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OAS can be deferred until you turn 70, google and you'll find details if you want.

April 28, 2024
9:54 am
Doug
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RetirEd said
It's an infantile abuse of the PM's name.  

Oh, then I support it. It's a mildly derogatory nickname for a political leader, which comes with the territory. sf-cool

April 28, 2024
10:02 am
Doug
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Loonie said
I'm not trying to suggest what this person ought to have as a goal. I'm just suggesting options and how to assess the outcomes. The rest is up to him.

The financial industry puts a lot more emphasis on encouraging you to contribute to
RSPs than on explaining the range of long term outcomes. Then, later, when people find out, they are angry at the government, but the rules have never fundamentally changed.

For spouse and I, it makes good sense to whittle down our RIFs with extra withdrawals, but we have particular circumstances, and one of those is probably uncommon. I stopped contributing when I realized what the outcome would be.

My RIF will be all gone this year, thank goodness, and I will be 77. It has taken longer than I thought it would, but glad to be rid of it.  

Oh, you're younger than I thought you were, Loonie! sf-cool

But, yes, I agree, RRSPs, particularly if you don't have a workplace pension of any kind provide little, if any, tax benefit. I would rather see the TFSA contribution limit increased to a maximum of $10-15,000 per year and RRSPs eliminated. Even just increasing the TFSA annual limit to $10,000, where it was for one year until Turdeau Trudeau and the Liberals having taken office in 2015, combined with the elimination of RRSP contribution room would be a huge step forward.

It's one of the reasons I bought a studio condo actually because (a) my condo I'd live in doesn't generate taxable interest income , thereby reducing my total taxable income for the year, (b) everyone needs a place to live, and (c) as a single person who lives modestly on $10-15,000 in expected annual expenditures with an expected annual gross income of $55-60,000, I still have plenty of room to save. I'd honestly rather invest in a taxable investment account where and when I've maxed out my TFSA (which I haven't yet), as at least then, I know what I've already paid in taxes.

Cheers,
Doug

April 28, 2024
10:17 am
AltaRed
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People tend to forget they were 'privileged' to be able to use 'before tax' income to fund an RRSP and get a tax deferred loan from the taxpayer to invest in a RRSP. All that RRSP/RRIF withdrawals do is to re-pay the tax owed to the taxpayer in the same way an annuity (DB pension) income does. Too much is made of RRSP/RRIF withdrawals being taxed as Other Income. It is exactly as it should be.

That said, I agree everyone needs to complete their own assessment (or have a competent financial advisor run scenarios) taking all the variables into account. Any such scenario is going to be a best guess anyway since none of us can forecast portfolio returns, or tax rates, or personal circumstances (health, longevity, etc) with any accuracy. Be ready to adjust when and as necessary if circumstances change significantly enough to warrant a change. That is the best any of us can do.

April 28, 2024
10:29 am
Doug
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AltaRed said
People tend to forget they were 'privileged' to be able to use 'before tax' income to fund an RRSP and get a tax deferred loan from the taxpayer to invest in a RRSP. All that RRSP/RRIF withdrawals do is to re-pay the tax owed to the taxpayer in the same way an annuity (DB pension) income does. Too much is made of RRSP/RRIF withdrawals being taxed as Other Income. It is exactly as it should be.

That said, I agree everyone needs to complete their own assessment (or have a competent financial advisor run scenarios) taking all the variables into account. Any such scenario is going to be a best guess anyway since none of us can forecast portfolio returns, or tax rates, or personal circumstances (health, longevity, etc) with any accuracy. Be ready to adjust when and as necessary if circumstances change significantly enough to warrant a change. That is the best any of us can do.  

That's true, yes, but structurally, the RRSP is a terrible product. It would be better if the federal government would revamp the pooled registered pension plans to create one, federal government-created, multi-employer sponsored, voluntary pooled registered pension plan, so any employer could opt in. They wouldn't be required to provide matching contributions, but there would be added corporate incentives for doing so. Individuals could immediately contribute, and there'd be essentially no paperwork for employers opting in. It would be like a true DC pension plan, with no ability to withdraw funds before retirement age and would come with creditor protections.

Cheers,
Doug

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