5 Reasons you should take early RRSP withdrawals

Withdrawals from your Registered Retirement Savings Plan (RRSP) and other registered accounts can be deferred as late as the year you turn 72. Tax deferral may seem like a good thing, but there are several reasons to consider early withdrawals from your RRSP.

Less Lifetime Tax

Consider a 65-year old couple, both with $1,000 per month of Canada Pension Plan (CPP) and $600 per month of Old Age Security (OAS). Let’s say they have $100,000 each in their Tax Free Savings Accounts (TFSAs) and $500,000 each in their RRSPs.

If we assume they need $25,000 per year to supplement their cash flow, they could take it from their TFSAs or from their RRSPs. TFSA withdrawals are tax-free, and they could take $25,000 per year from their TFSAs from 65 to 71 inclusive and that would be $175,000 cumulatively. This couple could defer their RRSP withdrawals until age 72 and rely solely on their TFSAs before that age.

However, assuming 4% annual growth for their RRSP accounts, their $1,000,000 in RRSPs would grow to about $1,316,000 by age 72. Their required minimum RRIF withdrawals would be 5.28% of the balance, or about $69,000, at age 72.

From age 65 to 71, their taxable incomes would be about $19,000 each, and their marginal tax rate on their next dollar of income would range from 15% to 30% depending on their province or territory of residence. At age 72, their taxable income would be about $57,000 each and assuming tax brackets increase at 2% inflation, their marginal tax rate would range from 28% to 37%.

Taking advantage of early RRSP withdrawals may enable this couple to pay less lifetime tax on their registered account withdrawals and maximize the tax-free growth of their TFSAs.

Related article:  Developing an RRSP withdrawal strategy

Less Tax on Death

If we continue to consider our notional couple, the higher tax payable resulting from deferred RRSP withdrawals could be magnified if one or both dies at a young age.

If one spouse dies at age 72, for example, the survivor will have their CPP and OAS income, as well as the entire required minimum RRIF withdrawal of about $69,000 on their one tax return. Their taxable income would be about $92,000, and their marginal tax rate would range from 43% to 53% depending on where they live (so high in part due to an OAS pension recovery tax resulting in a clawback of their OAS pension).

If that surviving spouse dies young or with a large RRSP/RRIF, the bulk of their registered account could be taxable on their final tax return at rates of 45% to 54%, leaving only about half after tax for their beneficiaries.

Related article:  What happens to your RRSPs when you die?

CPP/OAS Deferral

CPP and OAS deferral are both well worth considering for seniors with a long life expectancy, low-risk tolerance, or little to no defined benefit (DB) pension income.

Deferring CPP after age 65 results in a 0.7% monthly or 8.4% annual increase in the pension (plus inflation). Deferring OAS yields a monthly increase of 0.6% (7.2% per year, also inflation-adjusted).

Retirees who live into their late 80s or their 90s may leave a larger estate if they defer their CPP and OAS pensions as late as age 70. Risk-averse investors whose RRSPs will generate low returns can particularly benefit from drawing down their low yielding investments in their 60s and deferring government pensions instead.

Retirees who already have monthly DB pension income may already be protected against the risk of living too long, but those without DB pensions can add a combined 39% to their CPP and OAS income by delaying the start date to age 70. This could mean more than a $10,000 increase in indexed pension income for a 65-year-old contemplating pension deferral in 2019 (assuming 2% annual inflation).

Deferring CPP and OAS income can be considered in conjunction with early RRSP withdrawals and can result in higher potential retirement spending and a higher future after-tax estate value for some retirees.

Pension Income Splitting

RRIF withdrawals after the age of 65 are eligible for pension income splitting. Up to 50% of an eligible taxpayer’s RRIF withdrawals can be moved on their tax return to their spouse or common-law partner’s tax return in order to minimize combined tax payable.

Note that RRSP withdrawals do not qualify for splitting – an RRSP must be converted to an RRIF to generate eligible pension income.

Particularly for retired couples, the ability to take advantage of one or both spouse’s low tax brackets can be beneficial.

If one of the two spouses were to die prematurely, all future RRSP/RRIF withdrawals would be taxable on the survivor’s tax return, meaning a couple may have missed out on the ability to split pension income.

Related article:  Understanding pension splitting rules

Pension Income Amount

Eligible pension income qualifies for the pension income amount, a non-refundable federal and provincial tax credit. Retirees who do not have DB pensions can take RRIF withdrawals after age 65 in order to qualify.

The tax credit refund ranges from $359 to $449 for each spouse depending on province or territory of residence.

Retirees with RRSPs and no eligible pension income who forgo the pension income amount may miss out on almost $7,000 in cumulative tax refunds by the time they turn 72.

Related article:  Are you taking advantage of the Pension Income Tax Credit? 

Summary

These are some of the reasons that early RRSP/RRIF withdrawals may be a beneficial strategy. There are situations where early RRSP withdrawals may not be beneficial, however, particularly for lower-income seniors.

Just remember that RRSPs are tax deferral mechanisms, but the goal shouldn’t be maximum deferral all the time. It should be to contribute in high-income years, withdraw in low-income years, and try to minimize tax and maximize government benefits as best you can in retirement.

Written by Jason Heath

Jason is one Canada’s approximately 150 advice-only, fee-only Certified Financial Planners (CFPs). He does not sell any products or receive any referral fees. He has a particular interest in working with clients with complex financial planning issues, including Canadian expats in other countries, but works with single people, seniors and families at all planning stages seeking to take control of their financial lives. Jason is a Certified Financial Planner at Objective Financial Partners in Toronto and works via Skype with clients across Canada and internationally. He is also a personal finance columnist for the Financial Post and MoneySense.

25 Responses to 5 Reasons you should take early RRSP withdrawals

  1. I enjoy your articles.
    I am 60, still working government for a few more years.
    As a widower I feel I will be overtaxed and no tax allowance for being alone.
    At 65 the survivor pension will stop and I understand my cop will be at maximum for this reason.
    I have worked almost 40 years so my cpp would have almost been at the max without losing my wife.
    I think there ought to be a better deal for widows.

  2. Great post. It helps validate my decision to convert my RRSP to a RRIF last year and begin withdrawals this year well before it becomes mandatory. My husband has a low income so I can income split with him and I have decided to delay taking CPP for a few more years.

  3. one thing I found out for my father is unless you are in low tax bracket with combined streams of income note that in retirement homes or assisted living facilities there is tonnes of new write-offs unfortunately later in life.

    I also tell people is optimize not maximize rrsp contributions. Combine TFSA and rrsp streams with oas/cpp

  4. Very helpful article. Couple of thoughts:

    1. I’d love to see some charts to get an idea of tax implications at various levels. The $1M RRSP couple at the beginning of the article is fine, but perhaps also show what might be the best course of action at $750K and then $500K – will all that change?
    2. Funny how you see the different opinions on taking CPP/OAS early or not. Jason is more of a delayer, while the owner of this (Jim) seems to be more in the camp of taking it early.
    3. More stories on the early retirement crowd and how these decisions will affect them. Say showing the strategies for a 50 yr old, rather than always using 65. Similarly, there is a large co-hort working longer than “normal” so they could also benefit from a retire at 75 scenario.

    Thanks for your insights!

  5. So as a single person, my question is what are the benefits for someone who is single, with a non indexed defined benefit pension.?

    Thanks

  6. Great article! I really enjoy your articles. A long time ago, a friend told advised me to stop investing in RRSPs, since my income was rising and would likely be higher in retirement than it was when I was investing. I am now 59, and still working at a good job, probably until at least 66. While I am not concerned about paying taxes (I like civilization and it costs), reading the various retirement planning articles helps me to think carefully about my retirement strategies and how I need to plan.
    My main concern is related to health insurance, because my current coverage ends at age 75. So, I debate how much to save in case of health deterioration, since that is the potentially big unknown cost in my future. If there are any new ideas in this regard, I would love to read them.

  7. Good article. One of the real benefits of your site is the feedback and discussions in these comments sections.

    Is there any possibility of adding a timestamp to the comment posts so we can see the relevance of them – especially as financial rules change over time?

    Thanks!

  8. Great article I am single as well and I have stopped contributing to my RRSP this year. I am 63 and will withdraw from RRSP the next two years and top up my TFSA. I have a defined benefit pension and work casually as well. I agree that health insurance becomes a concern because as we age there is more dental work and prescriptions. Thanks Elaine

  9. Jim. I enjoy your articles. It is full of information that benefits one. I have used your information and have taken steps to make some changes to my plans to take additional benefits. Just wanted you to know there is another reader of your article is benefiting from sharing your knowledge…Keep it up….With the elections coming close may be you can share some of the offerings for seniors by each party to see how it will hurt / benefits your audience. Thanks again..

  10. How about using the average senior in Canada’s income instead of millionaires. I think that 100-200,000 is more in keeping with what most people have at retirement.
    Do some articles showing what options those people have.
    Yes, I am one of those.

  11. Thank you for good article. Also, I have question for you as follows: My name is Slobodanka 70 years old, retired in 2017. I’m getting OAS, CPP and GIS and my yearly income is $22,000. I have RRSP and I like to know when my RRSP will become RRIF and what amount and when I need to take out (who will decide that). Doe’s this amount will reflect on my GIS (will be lower for amount of the RRIF withdrawal).
    Also, do I need to take money from RRSP and put in TFSA account and what are the taxes. Thank you in advance.

    • Hi Slobodanka – I can only answer part of your question, regarding how any RRSP/RRIF withdrawals will affect your GIS amount. On average, your GIS will decrease by approx. 50% of any RRSP/RRIF income that you declare.

  12. I have a DB plan and my spouse does not so I am income splitting my pension with him. My husband has a small amount of RRSP about 120K. I am wondering if we should start an RRIF now he is 68. I also could start taking my CPP early starting next year. After reading this article I am wondering if it maybe it might be best to defer this to 65?

  13. If anyone is considering moving out of country to live, please get your OAS/CPP in order before you leave, because both are a very difficult to deal with when you leave. Three years after we left we were asked to provide “boarding passes” and have them notarized at the embassy or else. Of course the Cdn embassy refuses to handle non authorized mail and then the problems of communication between two government agency results in long delays on your pensions.

  14. I couldn’t agree more and take this line of thinking with my clients who are at or near retirement. I was recently talking to Bruce Sellery about this very topic on his radio show.
    Jason and Jim, keep up the good work!
    Steve Bridge

  15. Hello, great article (for couples with tons of money), but what about single persons? I retired at 62 four years ago and converted my RRSP to a RRIF (and withdrawing minimum each month). I also collect both CPP and OAS. My question is how can I reduce amount in RRIF at the least amount of taxes paid?

  16. Totally agree with your thinking here. The question I have is how much is a reasonable amount to withdraw? I know it depends on your total income, but some guidelines might be useful.

    You want the RRSP bled as fast as possible, so that when one spouse passes, the other doesnt get hit with a large marginal tax bill.

    I run my tax software in planning mode and try to keep the total income below the OAS clawback, the marginal rate under 30% and average rate below 15%. What do others do? Any better guidelines?

  17. My first RRIF payment is going to be at age 59. I’m 58, retired at age 53, with 2 DB pensions and a CPP survivor’s pension. The RRIF withdrawal will put my income to just under the top bracket. Otherwise I’d have way too much in RRSPs if I don’t touch them until age 71. Then there’s the CPP and OAS at age 65. If I put those off, the OAS will disappear via clawback, so I’m not going to defer those. I wish I had started taking money out of my RRSP when I was 54.

  18. Deferring is usually a beneficial strategy for most lower-income seniors who qualify for Guaranteed Income Supplement. To a certain limit, they may otherwise be foolishly accepting to have their GIS reduced equivalent to 50% of the RRSP/RIFF amount they choose not to defer.

    • Hi Segaran – There is virtually no amount of RRSP withdrawal that won’t affect your GIS. For the most part, any amount of RRSP withdrawal that you make will reduce your collective GIS by 50% of the withdrawal.

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