If you have been making contributions to your RRSP every year, you may also be familiar with the old saying when it comes to Income Taxes: “defer defer defer”. Well, perhaps you have been given the wrong advice after all!
The traditional way of thinking is to use up your cash savings or other money set aside, and not take money out of your RRSP until the absolute last minute. Some investors actually wait until they turn 71 when they are forced to convert their RRSP to a RIF, and then start taking the money out. This way of thinking was based solely on the assumption that in your later years you are making less money, and will be paying tax at a lower rate when you make withdrawals.
Investment advisors who only subscribe to this method of thinking are negligent and could be costing you more than you think. Why? Because when we turn 65 there is a whole new set of tax rules, credits and claw backs that we need to consider. We also need to take into consideration the potentially huge tax bill your estate will pay when you die and leave a large RRSP behind. Single people are extremely vulnerable to having their estates eaten up by big tax bills.
A full explanation could go on for pages and pages. Nevertheless, many of the tax perks offered to seniors can be clawed back due to larger RRSP withdrawals in later years. Seniors can lose their age credit, receive little or no Trillium Tax Benefit, have their Old Age Security clawed back, and have their income inflated which impacts their ability to get any tax credits for increased medical expenses in retirement.
I am adamant about one thing though. If you are still working, there is no reason to take money out of your RRSP unless your home is in foreclosure or you can’t put food on the table. If you are at least 55 years of age though,and have substantially retired, it may make sense for you to start taking money out of your RRSP now.
There are many RRSP withdrawal strategies available to you, but here is one for definite consideration. Many investors who are retired don’t need money from their RRSP, but they want to save tax. How about moving money from your RRSP -which is taxable – to your Tax Free Savings Account which is not taxable? Sure, when you take money out of your RRSP you will have to pay some tax, but when you deposit that money into your Tax Free Savings Account none of either the principal or earnings will be taxed again in your lifetime or to your estate.
Everyone’s situation is different , so I encourage you to consult with your advisor before taking any action.