Consider the Implications of RRSP and RRIF Withdrawals

It is Registered Retirement Savings Plan (RRSP) season once again, a reminder that the RRSP continues to be one of the finest tax-advantaged retirement savings vehicles we have. As the cost of living has risen alongside higher interest rates, there may be a temptation  to tap into plans like the RRSP or Registered Retirement Income Fund (RRIF). However, early withdrawals may have consequences. Any withdrawal is considered taxable income and must be reported on your tax return. For the RRSP and any amounts exceeding the required minimum RRIF withdrawal, an immediate withholding tax will apply. If you are using funds to pay down short-term debt, you may end up paying more tax on the withdrawal than you save in interest costs. Consider also that with market volatility in 2023, many asset values were put under pressure, so keeping funds within the plans may allow asset prices to recover.

The RRSP: Early Withdrawal Considerations — Making early RRSP withdrawals can have additional tax consequences. If your current income is higher than what you anticipate in the future, withdrawing funds now may result in paying higher taxes. Additionally, by withdrawing early, you miss out on the chance for ongoing tax-deferred compounding, one of the key benefits of the RRSP. To illustrate, a 35-year-old withdrawing $18,000 from the RRSP would have $100,000 less in retirement savings by age 65, assuming a 6 percent annual return. Moreover, once a withdrawal is made, valuable contribution room is lost, unlike other options such as the TFSA, where a withdrawal is added back to contribution room in the following year. If funds are required, options such as the Home Buyers’ Plan or Lifelong Learning Plan, subject to conditions, may allow for tax-free withdrawals and recontribution. For details, contact the office.

The RRIF: Minimizing the Tax Implications — Keeping funds within the RRIF is more difficult given the mandatory minimum withdrawal requirement. However, there may be ways to minimize the impact:

End-of-Year Withdrawals — Making withdrawals at year end allows more time for asset values to recover or grow to help optimize growth.

In-Kind Withdrawals — If you don’t need income/cash flow, opting for an “in-kind” withdrawal for the required amount allows you to retain ownership of the security. While the fair market value at the time of withdrawal is considered taxable income, transferring to a TFSA (if contribution room permits) can allow for future tax-free growth.

Income Splitting — RRIF income qualifies as eligible pension income for pension income splitting. If you have a lower-income spouse and you’re 65 or older, you can split up to 50 percent of your RRIF income to reduce your combined tax bill.

Delayed First Withdrawal — Consider that you aren’t obligated to make a withdrawal in the year that the RRIF is opened. Waiting until the  end of the following year, when you turn 72, is an option.

Use a Younger Spouse’s Age — If you have a younger spouse, using their age can result in a lower minimum withdrawal rate. Note: this can only be done when first setting up the RRIF, so plan ahead.

If you require assistance or would like to book an introductory call, please let our team know. We will be happy to help you.

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