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RRIF withdrawal - Different FI - Different process
July 12, 2017
12:44 pm
Cranston
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Just it start off. RRIF funds come from your RRSP funds. You can start a RRIF at age 55 and put all or manage some of your RRSP funds to move to RRIF.

Here is click here the mandatory withdrawal amounts by age.

Here is click here your tax with holds. No tax withhold on the mandatory amount.

July 12, 2017
3:14 pm
Loonie
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Previous discussion on this topic here https://www.highinterestsavings.ca/forum/oaken-financial/oaken-retirement-savings-product-is-it-rsp-or-rrsp/

There was also a previous thread on annuities which is relevant here. Annuities may be useful for some people as an alternative to RIF. With an annuity, you get a consistent payout annually, whereas with RIF you are subject to government minimums which gradually increase and can get quite hefty at the top end. These different systems have implications for income tax.
You have to look very carefully when shopping for annuities. There is a lot to learn about them.

July 12, 2017
3:24 pm
Loonie
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JenE said
I bought a 5 year GIC RRSP at Oaken last year and both Oaken rep. and I knew that I would have to RIF it before it matured. I was told that they knew they had to pay me the government-mandated minimum when the time came and that it wasn't a problem. I've also asked since then about riffing it early and withdrawing more than the minimum. Again, I was told that I could do that. Maybe I should re-confirm!

I guess the question is whether they will allow you, when converting your existing RSP GIC to an RIF, to set the withdrawal amount above the minimum.
I don't know the answer to that, although I think they ought to. The only RIF I have had so far is with TD, and on that form there was a space for you to say if you wanted more than the minimum, but it was in savings, not in an existing GIC.
I did ask them a year or so ago if you could change the withdrawal amount mid-term if you had , for instance, a medical emergency and needed more funds, and they would not commit themselves. They said you could talk to them about it at the time.

I think a lot of FIs have not yet woken up to the necessity of having a savings account portion for RIFs. It's much more important there than for RSPs.

July 12, 2017
4:16 pm
Loonie
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Cranston said

Keep in mind there is no such thing as a death tax but there are probate fees. In BC and if you do it your self, probate fees average 1.6% and probate court costs and notary fees are no more than $500. BUT income tax can be a huge hit especially from RRIF or RRSP funds.

That's why I put "death tax" in quotes earlier. Technically, it isn't, but in fact it is because you only pay the very high marginal rate when you die and leave a lot of money in your RSP/RIF. If you live long enough to spread it out or cash it gradually, you can usually avoid the high rate. so, effectively, it's a death tax rate.

I understand that it's a retirement plan and not an inheritance plan, but, still, I think it's unfair for people to be taxed at a higher rate than the refund they got when they first took it out. And this is why I think that, although RSPs may become less popular, the govt won't be in any hurry to get rid of them - too lucrative.

July 12, 2017
5:29 pm
AltaRed
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That dilemma has been argued many times. Bottom line is the investor had the use of taxpayer money (deduction refund) available for investment purposes for all those years (at whatever marginal tax rate it was at the time). It is only fair they get it back and a share of the profits at time of withdrawal.

That said, marketing of RRSPs should include some investor education that while the contribution may/should be made even in low earning years, hold back on the deduction until one is in at least the big middle class tax rate, and if lucky in the next tax bracket. Too many people are deducting contributions while in the first 15% federal tax rate and that is simply not advantageous.

The way to avoid the big tax hit on a pre-mature death is to annuitize at least some of the RRSP/RRIF account and take the risk on longevity. That said, a pre-mature death results in money being left on the table in both cases, i.e. cessation of annuity payments, or a big tax bill on the RRSP/RRIF... assuming 'last to die' of course. An annuity can be bought as a joint (last to die) annuity, and a RRSP/RRIF can be transferred to a surviving spouse (as a beneficiary).

We can't have our cake and eat it too.

July 12, 2017
5:52 pm
Bill
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It's not fair if I'm taxed at higher rates than when I claimed the deduction, it's only fair if I'm taxed at lower rates than when I claimed the deduction. sf-wink

And a big part of the marketing of RRSPs is the immediate tax deduction, no way the sellers of retirement products are going to suggest deferring the deduction.

And what kind of a choice is that - why would you ever want cake that you can't eat??

July 12, 2017
6:19 pm
AltaRed
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I agree financial industry marketing can lead to poor decision making but should gov't be the paternal father and protect us from ourselves? The gov't is complicit because they stand to win too... Not so much by higher 'death taxes' or higher marginal tax rate on withdrawal.... but the fact that more people will have retirement plans than they would otherwise. Imagine the burden on the GIS program if twice as many Canadians entered retirement in the poor house with nothing more than 5 figures in a low interest banking account.

July 12, 2017
6:32 pm
Loonie
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AltaRed said
That dilemma has been argued many times. Bottom line is the investor had the use of taxpayer money (deduction refund) available for investment purposes for all those years (at whatever marginal tax rate it was at the time). It is only fair they get it back and a share of the profits at time of withdrawal.

That said, marketing of RRSPs should include some investor education that while the contribution may/should be made even in low earning years, hold back on the deduction until one is in at least the big middle class tax rate, and if lucky in the next tax bracket. Too many people are deducting contributions while in the first 15% federal tax rate and that is simply not advantageous.

The way to avoid the big tax hit on a pre-mature death is to annuitize at least some of the RRSP/RRIF account and take the risk on longevity. That said, a pre-mature death results in money being left on the table in both cases, i.e. cessation of annuity payments, or a big tax bill on the RRSP/RRIF... assuming 'last to die' of course. An annuity can be bought as a joint (last to die) annuity, and a RRSP/RRIF can be transferred to a surviving spouse (as a beneficiary).

We can't have our cake and eat it too.  

You get taxed on the profits too, when there are profits. The issue is being taxed (on principal and profits) at an exhorbitant rate just because you happened to die at the wrong time. I don't see how that is ever fair except to say that it's for retirement, not for inheritance, by design, so too bad if nothing left over. But when it's my money, I don't buy that argument either.
The thing is, if you put money in RSPs when you're young, as many of us did (when TFSAs did not exist), you have no idea how long you'll live, how much money you'll ever make, how much you'll have in retirement, etc., so you think it's a safe conservative idea to put money in RSP. Then if it turns out you had more than you thought you might, and you don't live to 100+, you get dinged with the death tax.
At best, we get told it's a tax deferral. But that is evasive too as it avoids the fact that you may end up paying more tax than you would have if you'd kept the money out of the RSP, or you may end up paying less if you're a bad investor. Crap shoot. To be avoided, as with all speculative investments.

July 12, 2017
7:07 pm
AltaRed
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Well, we get taxed on all profits (other than TFSA) anyway so whining about being taxed on profits doesn't get sympathy from me. The tax we pay on principle is also justifiable since we invested on a 'before tax' basis. We have to pay taxes on that money sometime.

At best, we get told it's a tax deferral. But that is evasive too as it avoids the fact that you may end up paying more tax than you would have if you'd kept the money out of the RSP, or you may end up paying less if you're a bad investor. Crap shoot. To be avoided, as with all speculative investments.

The problem of paying 'too much tax' is indeed a dilemma but none of us know 'in advance' how successful we will be in our careers, our investing ability, and our lifespan. We go into our careers making an assumption we will work to 65, make a reasonable living, and a comfortable retirement, and a 50-50 chance of surviving our actuarial best before date. Somehow it seems to me that it is only 'us' who have been successful in both our careers and investing acumen that now grouse about the tax bill on our portfolios. I don't like it either but I'd much rather be paying more (with a comfortable portfolio) than I would be paying less and scrapping by. A good problem to have in my opinion. The RRSP is thus still a good vehicle.

July 12, 2017
8:49 pm
Cranston
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Oaken RRIF withdrawal

For scheduled (or required minimum) RRIF payments, below is the order in which the system will make the payments from RRIF plan with multiple GICs (only 1,2,3,4,5 year RRIF GICs are offered at Oaken) at the specific payment date:

1) Interest- it will take whatever interest that has accrued on all RRIF GIC investment held in the plan, and if that does not satisfy the minimum then

2) Principal- it will take funds from the principal from the investment with
..............lowest interest rate
..............If the interest rate is the same between 2 or more investments then it will take the funds from the one that has the earlier issue date
..............If the interest rate is the same between 2 or more investments and they have the same issue date, then funds will be taken from the lowest active account number

If exceeding the mandatory amount. Maturity notices are mailed out 45days before the maturity date. At maturity of a RRIF GIC, a signed letter of direction (maturity notice) is required to be submitted for processing a redemption for the specified amount (and subject to the applicable withholding taxes).

July 12, 2017
8:50 pm
Cranston
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Accelerate RRIF withdrawal

If you hold multiple RRIF GIC's with Accelerate the mandatory required payment is taken from the lowest interest bearing RRIF GIC. If you hold RRIF GIC'S and a RRIF variable the payment is still taken from the lowest interest bearing GIC unless specified to be taken from the RRIF variable. No tax withhold.

If you request a specified payment, which means you would take a payment over and above the minimum on a regular basis. We would take the withholding tax only on the amount that is over your minimum RRIF payment. From savings account or mature GIC.

If you are looking at taking an extra payment after you have already received your RRIF payment then you can take an extra payment of up to 20% of the value of the RRIF and that is subject to withholding tax.

July 12, 2017
8:51 pm
Cranston
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Hubert RRIF withdrawal

The RRIF annual payment is removed from the RRIF product receiving the lowest interest. If you have a balance in a RRIF savings account it will be deducted the entire payment, if only partial amount in the RRIF savings it will remove partial and the remaining payment amount from the lowest paying RRIF term deposit.

July 12, 2017
8:54 pm
Cranston
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My preference to manage a RRIF withdrawal that exceeds the mandatory is to have the funds ready in a RRIF savings account. Then all other GICs are untouched and you know what the matured value is and you get the full value of compounding.

July 12, 2017
10:24 pm
Loonie
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AltaRed said
Well, we get taxed on all profits (other than TFSA) anyway so whining about being taxed on profits doesn't get sympathy from me. The tax we pay on principle is also justifiable since we invested on a 'before tax' basis. We have to pay taxes on that money sometime.

  

I haven't heard anyone whining about being taxed, either on profits or principal.

The issue, for me at least, is about getting taxed unreasonably based essentially on when you happen to die. Die at 65, have no spouse? - You may well be in the highest tax bracket simply because of your RSP, your estate will get massively dinged, and your heirs will be aghast to put it mildly.

Die at 100? - you will have minimized or cashed out your RIFs completely, and at a steady rate which attracts fair tax rate for your tax bracket and your heirs will do well as there will only be probate to pay (and lawyers!)

July 12, 2017
10:46 pm
Loonie
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Cranston said
Hubert RRIF withdrawal

The RRIF annual payment is removed from the RRIF product receiving the lowest interest. If you have a balance in a RRIF savings account it will be deducted the entire payment, if only partial amount in the RRIF savings it will remove partial and the remaining payment amount from the lowest paying RRIF term deposit.  

Yes, and the savings account is typically paying the lowest interest anyway.

Thanks for the research.

I am having trouble imagining what difference it makes if they take it from your interest (in GIC) or from principal, assuming annual compounding. The interest in effect becomes part of the principal during the subsequent year and gains interest in the same fashion as the previous principal.

Taking it from the GICs with the lowest interest rate makes good sense, if no RIF savings account.

Seems to me that these 3 policies are fairly similar except that Oaken does not offer savings account and Accelerate does offer additional withdrawals from GICS AND savings accounts. If there is a savings account, the need for provision for additional withdrawals is reduced. And if additional GIC withdrawals are allowed, there is less need for the savings account and you can maybe remain more fully invested in the GICs, bringing better return.sf-smile

The savings account really is essential. I hope Oaken figures this out soon. It's still not clear to me whether they will allow you to set up the RIF for an above-mandatory withdrawal if you are converting to RIF mid-term.

July 13, 2017
3:44 am
Loonie
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Here is an option I didn't know about before: the Non-Prescribed Annuity.
This is NOT a tool for your RIF, but I think it might be something that could offset the burden of increasing withdrawal rates for some people. Of course, it depends on individual circumstances.

I gather that this is the way it works:
You buy this kind of annuity with your non-registered funds (assuming you have some). Being "non-prescribed" means that it is written in such a way as to ensure that you receive an increasingly lower portion of the payout in taxable income as the years pass. (An advantage of all non-registered annuities is their low taxable income because a significant portion of the money you receive is money that you already were taxed on before you contributed it to the annuity.)

Seems to me that if one part of your income is going up at a sometimes-alarming rate (i.e. the RIF withdrawals), then this would be offset to some degree by another income source that was providing a steady income with increasingly less taxation.
I could see this being potentially useful especially starting around age 80, when the mandatory withdrawals start escalating more significantly. By the time most of us get there, interest rates might be high enough to make it quite attractive. It also offsets bad decision-making which can come after 80.

July 13, 2017
9:09 am
Cranston
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Die at 100? - you will have minimized or cashed out your RIFs completely, and at a steady rate which attracts fair tax rate for your tax bracket and your heirs will do well as there will only be probate to pay (and lawyers!)

I had a 93 year old friend who recently passed. Even with his minimized RRIF account he was paying approx $5,000 in income tax and was income splitting with his spouse. Was he a millionaire.......no. So still a win win for the Feds even though he received tax credits for his RRSP contributions.

No doubt RRSP and RRIF was well thought out by the Feds and it is a "self funded pension" that the FIs don't want to be too flexible with. They want to keep your money and while you can withdraw more than the mandatory some make it difficult to do so.

In my mind the best new tool the Feds gave us was the TFSA which allows us to reposition RRSP/RRIF funds. This lessens our largest taxable pot in the event of passing with no successor. I think this is a worthwhile effort even if you have non-registered investments that you could put into TFSA. I guess that will be my inheritance gift......less taxation 🙂

July 13, 2017
9:18 am
AltaRed
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Loonie said

I haven't heard anyone whining about being taxed, either on profits or principal.

The issue, for me at least, is about getting taxed unreasonably based essentially on when you happen to die. Die at 65, have no spouse? - You may well be in the highest tax bracket simply because of your RSP, your estate will get massively dinged, and your heirs will be aghast to put it mildly.

Die at 100? - you will have minimized or cashed out your RIFs completely, and at a steady rate which attracts fair tax rate for your tax bracket and your heirs will do well as there will only be probate to pay (and lawyers!)  

Many people on a variety of forums have complained about being taxed in a higher MTR upon RRIF withdrawal and/or estate collapse than the MTR when they put money into the RRSP. While if can be true for those fortunate, and wise enough, mass a large RRSP, they also forget about the time value of tax deferment all those years too. Tax software called RRIFMetic developed by Steve Salzer can show the RRSP/RRIF wins most of the time... premature death notwithstanding. Since none of us plan for premature death, we can only do the best we can to plan on living to 90 or 95.

I don't worry about heirs/beneficiaries other than my spouse, the latter of which can get to it with a spousal rollover if beneficiary designations are in place. My supposed 'other' heirs can and should fend for themselves and be greateful for any crumbs sent their way. Actually they will likely do well, and my executors should be smart enough to donate enough shares in kind to offset much of the estate taxes anyway. A charitable cause can do wonders to decrease the tax burden or eliminate it entirely.

July 13, 2017
2:16 pm
Loonie
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I have never had much luck understanding the concept of the time value of money, and don't know what it would mean for people who actually have lost money on their investments at time of death, esp if premature. However, they probably would have lost the money if in RSP or not.

Great idea about the charitable gift! You can donate up to 75% of your income and get tax credit for it.

I don't understand why someone would complain about a tax bill of 5k. It depends on what percentage that is of their income and what advantage they got from the RSP in the first place etc.

July 15, 2017
9:53 am
Peter
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I've spun off the discussion about living frugally to another thread, so this thread can continue to be about RRIF withdrawals.

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