Cashing out RRSP | Page 2 | RRSPs and RRIFs | Discussion forum

Alexandre said

Is there any flaw with that plan you can point at?  

Others have alluded to something peripherally, but one thing to consider:

Not a flaw necessarily, but in your 65-71 age bracket you could convert some RRSP to RRIF and get the pension credit on $2,000 annual withdrawals. I didn't see any other source of pension income that could take advantage of the credit.

Withdrawing from RRIF earlier may impact GIS payments, but will also reduce future tax liabilities. As others have written, modelling your exact situation is the only way to determine what's going to be best for you.

Loonie said

The alternatives could include such things as RESP for kids or grandkids (gov't subsidy), the registered plan for buying a 1st home (I forget the name of it), dividend-paying Cdn stocks (dividend tax credit is lost in RSP) or stocks eligible for capital gains lower tax rate and deductions for losses, real estate (bigger or additional or profitable upgrades - bigger incus no cap gains tax), investing in art or similar, saving for a non-registered life annuity (very low tax on the income for life, whereas RSP has high tax and can either run out or draw huge tax when you die), and so on.
The only tax advantage you get from an RSP is the deferral on tax on your contribution; when you cash it, you will always be taxed at your highest marginal rate. Thus, people often choose GICs etc , giving them low flexibility, or they venture into stocks about which they don't know much and then find they can't deduct losses because the funds were in RSP

Each person has to choose what's best for them. For some, RSPs are the answer.  

@Loonie:
Thanks a lot for providing this extensive list of options besides RRSP.
You summed it up nicely below:
"Each person has to choose what's best for them. For some, RSPs are the answer."

Question:
I am trying to wrap my head around the assumption that:
"I have to believe, I will be poorer after retirement, and invest in RRSP, to get a better return on my RRSP. And if I will be rich I will have to pay the marginal rate? So do not see the point of tax defferal, If I think positive."

@Loonie: Am I correct in my assumption above?

Just for our discussion sake, If I am rich, I have the freedom to withdraw as much as I want.
Else I have to restrict how much I will withdraw.

It comes down to one “if”: using RRSP tools properly. In that case using RRSP for retirement investments is totally worth it and you benefit tremendously.

Any financial tool can be misused and if thats your assumption then everything is bad.

usephrase said
@Alexandre
Can you please explain why you optimize a plan like this?
I understand in order to be eligible for GIS, have to postpone CCP and RRSP withdrawal until 71, but why will this plan maximize the benefits ? why did you separate in group of 65-71 and 71 -> ? how did you know this plan is the best ?

My start point is 55 because this is when I retired. I did expect I'll be working till 60 at least, but life happens.
My funds (registered and not) are all in cash and 1 year GICs. That makes financial planning easier, as my net worth is not dependent of which way stock market goes or gold price moves, and so on.
I am debt free.

My objectives are:
1. Not run out of money during my lifespan;
2. Rely on all available to me government benefits such as CPP, OAS, GIS;
3. Maximize all other senior citizen benefits;
4. Minimize tax rate I am paying during the retirement years, which will assist with my objective #2, as many benefits depend on taxable income.

Objective #1 may require clarification.
For example, in my plan I presented I expect to apply for CPP at the age of 70, when it is at maximum. Someone might say: "Alexandre, but if you pass away at the age of 75, you may be better off starting CPP at 65 or even earlier."
My answer would be: my objective is not to maximize benefits I plan to get from the government, but not run out of money. If I am dead at 75 and I did not need CPP before 70 to cover my expenses, I don't care.

I am not going to convert RRSP to RRIF between 65-71. Every $1 of RRSP/RRIF withdrawal at these years will cut GIS benefit by $.5. It is like 50% income tax, which is more than any pension tax rebate is.
There is also chance to lose GIS at all, if interest income and RRIF withdrawals exceed taxable income threshold for GIS. OAS is not considered income for GIS, so just these other two will influence my GIS eligibility.

Having GIS will open door for other benefits. For example, my municipality offers noticeable reduction of property tax for seniors receiving GIS, and there is more.
One could receive just few dollars a month from GIS and will still be eligible for 100% of all these benefits. Lose GIS and you lose it all.

Come 70-71, when I am forced to withdraw from RRIF. This is when I'll be applying for CPP. This is when I'll stop gaming the system, say sayonara to GIS and will pay whatever taxes I must.

I think what Alexandre meant was OAS is not considered income for GIS qualification eligibility but is none the less taxable income itself (as it should be). I am not particularly fond of folk gaming the social support system for personal gain but understand if the country allows it, then of course, people should game it if they wish. It seems to me though that one would need to live on very low cash flow (TFSA withdrawals excepted) to be in GIS eligibility range.

I have much larger problems with the claw back thresholds for OAS and would cap that social support system completely for incomes over $100k and instead, re-allocate it to the GIS program where it is way more needed.

Yes, okay. I did comment that I thought you might draw down your TFSA (non-taxable income) to supplement your cash flow without increasing taxable income, but you can also do this with taxable account assets if they are all GICs (no capital gains) - which I now remember is the case. I never think of the latter option (GICs) since I don't have any. My portfolio is almost entirely equities with some HISA/ISA/MMF allocation.

It says that financial advisor will estimate how much you should save for your retirement. I do not believe the estimates because nobody can forecast what will happen after 20, 30 or 40 years.

What I can do is to manage my finances, how to earn more money by investing. I do not know much about investment, so index ETFs, bank stocks are the best investment for the beginners , like me.
I have learned the basic of tax strategy.

CAD said
For somebody who has a million or so in RRSP isn't it better to try to empty it before doomsday and take OAS/CPP when forced to?  

I hope you don't mind if I answer that.

Take 71 years old senior with now RRIF (converted from RRSP) of $1M. For age 71 mandatory RRIF withdrawal rate is 5.28%.
This is going to be that senior minimum annual income: $64,000 = $53,000 (from RRIF) + $11,000 (from OAS).
Minimum, because one must add senior's CPP and other pension plans on top of that, which for many people is above $0.

This is not bad, in today's money. It is at least median Canadian salary.
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If I had $1M in RRSP, I would just wait till 71 before touching in.

Thanks for correction. My original comment, after that correction:

Take 72 years old senior with RRIF of $1M. For age 72 mandatory RRIF withdrawal rate is 5.4%.
This is going to be that senior minimum annual income: $65,000 = $54,000 (from RRIF) + $11,000 (from OAS).
Minimum, because one must add senior's CPP and other pension plans on top of that, which for many people is above $0.

This is not bad, in today's money. It is at least median Canadian salary.
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If I had $1M in RRSP, I would not touch it till I must convert it to RRIF.

CAD said

And then WHEN are you going to use all those money sitting in RRSP?
For somebody who has a million or so in RRSP isn't it better to try to empty it before doomsday and take OAS/CPP when forced to?  

Good question. It might not be the optimal strategy for maximizing lifetime spending but people seem to be driven by a) maximizing use of government benefits and b) keeping accounts full for as long as possible, aka until death.

I don’t agree with this approach. Maximizing OAS… I can see the arguments for and against. Maximizing benefits meant for the poor just because the system has loopholes seems wrong.