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Registered Savings Plans – Establishing a Withdrawal Plan

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rrspTwo questions have to be asked with regard to RRSPs: "when do I start to withdraw?" and "how much do I withdraw?" Unfortunately there is no cookie-cutter answer for either of these questions; every situation is unique. Does the retiree have a defined benefit pension plan or one that is defined contribution? Is he or she planning to retire early, at age 65, or later?

How much registered capital does s/he have? To what degree does s/he rely on that capital for retirement income, pensions and government benefits? Which form of income is best spent first? Which should be used up last?

If your head is already spinning, let us provide some reassurance. Although there is no cookie-cutter answer, we have developed a process to help answer these questions.

Let's first review how an RRSP is designed to provide retirement income. RRSPs are tax-deferred accumulation vehicles to which you can contribute, given set limits, until you reach age 71. . Contributing to an RRSP reduces the annual income you report to the Canada Revenue Agency, saving you the income tax normally due on those earnings. Further, investment growth within an RRSP is not subject to income tax each year either, allowing investment returns to compound faster than funds held outside a registered plan. At age 71 an RRSP must be converted into a Registered Retirement Income Fund (RRIF) or registered annuity. It's important to remember that once you begin to withdraw these funds for retirement income, income taxes are paid on every withdrawal.

In Ontario, when someone passes away, his or her registered money first rolls tax free to the spouse. If there is no spouse, the assets are deemed disposed (sold) for their market value and are taxed in one lump sum on the deceased's final tax return. There are cases in which the registered funds deferred to an estate push the deceased's final year's income into the top tax bracket. The result in this instance is that a significant portion of the registered assets are paid as income tax to Canada Revenue Agency. This is not an ideal scenario.

So how does our process help you keep together what you've put together? It reminds us that we have different sources of income in retirement, and when it comes to minimizing income taxes, some sources are best spent first and others are best spent last. Since registered savings are highly taxable in an estate, it's worth discussing whether these funds should be withdrawn earlier than traditional planning might dictate (Age 71). Withdrawing smaller amounts over a longer period of time can be a viable strategy for retirees not currently in the top tax bracket. Contributing the withdrawn funds to another bucket called the Tax Free Savings Account (TFSA) is a great way to continue tax-deferred growth, and maintain named beneficiaries. This approach to estate planning ensures a transfer of tax-free capital to beneficiaries.

 

 

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