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How to Transfer an RRSP to a TFSA without Tax Consequences
January 27, 2019
3:33 pm
Loonie
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...and the RSP holder would be paying for all of 'em, not to mention the Regulatory Risk as Jon emphasized.

I'm aware of Reynolds' book but have not read it. Am working diligently and successfully to whittle down RIF/RSPs as tax-efficiently as possible - the conventional way.sf-smile

January 28, 2019
6:09 pm
martik777
Lower Mainland, BC
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Norman1 said

martik777 said
I don't mind paying 20% marginal on RIF withdrawals. As a couple we only would need to pay any excess over 40k per year since this is our personal + age exemption.

After all, I got 40+ yrs tax free growth and was in a 45% marginal when contributing.

What I think is very unfair is the 50% they will be taking from my estate

It won't be as bad as it looks.

If one had claimed the RRSP contributions deductions and got 45% back from the government, then 45% of the RRSP's value is from the taxes saved and the growth on those saved taxes.

If the government takes back 50% in the end, then they are taking back the original 45% plus 5%. Your estate would end up with 50% instead of 55% or about 9.1% less than with a TFSA.

In the meantime, you are paying just 20% on the RIF withdrawals. Government is only receiving 20% back of the 45% in taxes saved through the RRSP deductions. You are now receiving 80% instead of 55%. That works out to be about 80 / 55 - 1 = 45.45% more than with a TFSA! sf-laugh  

I ran a scenario of 35 yrs with a 10k annual rsp contribution at 45% marginal vs a TFSA contribution of 6k per year at 6% return.

Total contributions are 192,500 for both after tax refund

RSP end value is 1,181,209 and TFSA is 649,665

RSP after 50% tax is 590,604 which would be worst case if you died after the 35 years. The RSP is the better option when you can withdraw at a lower tax rate and 20% marginal is quite doable for a mid class lifestyle, even 0% if a couple can keep income under 42k. (combined personal exemptions in BC)

I feel better now lol sf-laugh

January 29, 2019
6:35 pm
Norman1
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martik777 said

I ran a scenario of 35 yrs with a 10k annual rsp contribution at 45% marginal vs a TFSA contribution of 6k per year at 6% return.

Total contributions are 192,500 for both after tax refund

RSP end value is 1,181,209 and TFSA is 649,665

RSP after 50% tax is 590,604 which would be worst case if you died after the 35 years. The RSP is the better option when you can withdraw at a lower tax rate and 20% marginal is quite doable for a mid class lifestyle, even 0% if a couple can keep income under 42k. (combined personal exemptions in BC)

I feel better now lol sf-laugh

As long as the average rate of the taxes and clawbacks on the RRIF withdrawals is lower than the average rate of the taxes saved by RRSP deductions, then one is ahead with the RRSP.

So, if you were able to withdraw 80% of the RRIF over the years, paying 20% in taxes, and then the remaining 20% is taxed at 50% on death, the average taxes is

0.8 x 20% + 0.2 x 50% = 26%.

That 26% would be lower than the 45% saved by the RRSP deductions.

You and your estate will have kept 74% with the RRSP compared to 55% with a TFSA. That works out to be 74/55 - 1 = 34.5% more with the RRSP.

January 29, 2019
10:15 pm
Loonie
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That's a big "if", Norman; and I don't think it fits very many people.
While we are busy making withdrawals, the asset is also increasing in value, so that it's quite difficult to cash in 80% unless you have quite a small RIF and/or very low other income.

January 29, 2019
10:40 pm
martik777
Lower Mainland, BC
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I think a "cash-in" rate of 90% would apply to many of us:

Using the avg CPP of $664 and OAS of $601, the avg couple would have annual income of $30,360

With a 500k RIF at 3% using minimum withdrawls, they would never exceed about 24k and would last until age 106 or so.

That brings their combined income to only 54k.

A couple has about 42k of personal exemption and about 93k in the 1st 20% bracket.

For this example their avg tax rate on the RRIF would be only 10%

(54k - 42k) * .2 = $2400 tax on 24k RIF payment

[Once a spouse dies, this will go up to near 20%]

on a 1,000,000 RIF the tax would be 15%

January 29, 2019
11:35 pm
Loonie
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You have a point, martik, although this computation dos not include the reduction in the Age Amount.
I was probably subconsciously thinking about a number of people on this website, who seem to have more substantial resources.
But I know the average income for seniors in Canada is not all that high. I'm not sure how many of the low income ones would have 500K in RSPs though. The low income seniors I know, who have no company pensions, also do not have RSPs. They have usually lived paycheque to paycheque.

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