Excess Withdrawals from Your RRSP or RRIF – Part 1

Excess Withdrawals from Your RRSP or RRIF – Part 1

“Should I listen to the advice that I only withdraw the required minimum amounts from my RRIF?”

That is common guidance, but it misses the bigger picture. There are situations to only withdraw the required minimum amounts and there are situations to make excess withdrawals from a RRIF.

{Assets remaining at year of the last death} are the assets remaining after income tax upon the last death of an individual or a couple, the remaining assets available to pass on to your heirs. The true test of a strategy on using your retirement funds is whether it will increase {Assets remaining at year of the last death}, not how much income tax you might pay.

Excess Funds in Your RRIF

If your projections of retirement income show that you will have funds left in your RRIF at death, this amount will be taxable on your Final Return. For example, if you were to have $1 million left in your RRIF at death, the first $250,000 will be taxed at the graduated rates and the amount in excess of $250,000 will be taxed at the top income tax rate, (53%  in Ontario). What can you do?

Given your tolerance for risk, the investment return that you would expect from your various accounts: your RRIF, TFSA, and tax-paid capital account (Cash account), should be the same for each account. However, the after-tax return will vary dramatically.

The capital of your RRIF and the return on your RRIF is fully taxable regardless of the form of the return. The capital of your TFSA and the return on your TFSA is NOT taxable regardless of the form of the return. The capital of your tax-paid capital account and the return on your tax-paid capital is taxable depending of the form of the return: eligible dividends, non-eligible dividends, interest income, foreign dividends. and taxable capital gains.

So, will you benefit by making an excess withdrawal from your RRIF? Maybe!

You will have to pay income tax on the excess funds that you withdraw from your RRIF. The net investable non-RRIF funds will be the excess funds less the income tax. Of course, the assumption here is that you invest these funds in your TFSA, tax-paid capital, or a family trust.

You will benefit if:

• the net investable non-RRIF funds in your TFSA and tax-paid capital plus the cumulative after-tax returns; exceeds
• the RRIF funds remaining in the year of death after deducting the income tax on the RRIF on your Final Return.

How will you know if you should make excess withdrawals?

There are no simple calculations. The Canadian Retirement Planner's Software will enable you to prepare a {Projection of Retirement Incomes} and calculate the {Assets remaining at year of the last death} testing your withdrawals of Excess Funds from your RRIF over your years of retirement.

I have found that making the excess withdrawals over all the years of retirement provides the maximum benefit adjusted, of course, for any year that has an unusually large gain or loss of income. But you can check out your own situation.

For more insights, check out the blogs/emails, Excess Funds from Your RRIF - Part 2, coming next week.

YOU must take the initiative to shape your retirement finances for your benefit.

David R. Gobeil, MSc, CPA, CA, CFP®

Gobeil & Associates