0 rates present opportunity to collapse Rsp/rif | RRSPs and RRIFs | Discussion forum

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0 rates present opportunity to collapse Rsp/rif
March 30, 2020
5:37 pm
Bud
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If there is any good in all this its that zero interest rates would make dumpin rrsps rrifs a big tax saving opportunity for many especially seniors.

March 30, 2020
10:01 pm
Loonie
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How do you figure that, Bud?

March 31, 2020
10:09 am
rodeworthy
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Bud,
That is exactly what I am planning to do. Actually, I made the decision when interest rates dropped below 3%. The last GIC we bought was in July, 2019. We have 22 active 2-yr GICs that will progressively mature monthly until they are all redeemed by July, 2021. There will be no more. Certainly, no more until interest rates improve. We do not need more income. Preservation of capital is more my worry these days.

All our expenses are met by what I term “income from labour”. We don’t ‘work’ for money anymore but pensions and government benefits are lumped into this category. “Income from capital” therefore just creates more capital. It has us bumping up toward higher tax category and close to clawback territory for OAS.

We have done very well with saving over the years. I have not done such a good job managing RRSP and RIF money. It has been left to grow until that day when it was needed for ‘that reduced income in retirement years’ that we supposed was coming. That didn’t happen. We have only drawn down the minimum payouts required by government. Our RIFs currently represent 26.4% of our monetary assets. They also represent the only debt we have – the debt of deferred taxes yet to be paid. A considerable amount. We need to start taking larger payouts from those funds to reduce this debt. I prefer pay as you go.
With the reduction in interest rates in the current environment it will make the job easier to extract larger payouts without bumping into higher marginal tax rates and OAS clawback. The problem is trying to figure out what those higher payout amounts will be to meet these criteria. I doubt we will be able to deplete the funds entirely before we meet our demise.

I hope this doesn’t sound like bragging to the younger set out there. It is just the way things are after many years of managing money carefully. We are middle of the road folks who have done that.

If I could offer any advice it would be to pay closer attention to where your money goes compared to where it is coming from. We did that and it worked for us.

March 31, 2020
10:17 am
Doug
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Loonie said
How do you figure that, Bud?  

+1 to this. Bud's assertion of tax savings by collapsing a RRIF is fundamentally flawed While it's true that the lower-for-longer interest rates on deposits make the tax advantages of RRIFs and RRSPs in terms of the much more muted compounded tax-deferred growth, ultimately, when withdrawn, one has to pay tax. Unless one's income is now materially lower than in the previous year, there is no tax advantage to collapsing a RRIF or RRSP. It certainly has little, if any, correlation to zerobound interest rates.

Having said that, if one had been expecting to become employed this year and is no longer expecting to be employed until late this year, then it absolutely may make sense to withdraw, in whole or in part, one's RRSP, particularly if one would still be in the lowest marginal tax bracket. One could even spread the withdrawals over two years to further minimize tax implications. In turn, one could max out their TFSA and make their TFSA the primary focus of their retirement savings going forward.

Cheers,
Doug

March 31, 2020
11:12 am
Loonie
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Maybe he was thinking of negative interest rates, which would reduce the capital and thus the withdrawal and consequent tax?

March 31, 2020
12:30 pm
Bud
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For example, someone with a $500,000 rrif the annual withdrawal can be around $30,000. A retired person may have less income outside their plan due to zeroee rates or can share/shift other savings income thereby lowering their tax bracket. Another example a rrsp holder who realizes the shelter was a mistake, wants out, perhaps he's employment income is reduced due to corona. There are plenty of people with rrsps who dont have regular employment income. The self-employed may find it more advantageous to reduce income or dividends in the year funds are withdrawn.

March 31, 2020
12:53 pm
Loonie
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That's true, as far as it goes.
But you are really trading off the RIF tax savings for lower non-registered income, the latter being unavoidable. So it doesn't really feel like a tax savings.; more like an income loss as you are taking the money from yourself to compensate the loss.

I make these adjustments in withdrawls every year, along the lines of what rodeworthy said. But taking more out of the RIF doesn't make me feel I am ahead. Net worth will be lower than it would have been with higher rates (and not just from the deferred tax payout).

But, if it makes you feel better, great!

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