You’re Retiring and You’ve Got Registered Savings. Now What?

When it comes to using a Registered Retirement Savings Plan (RRSP), clients who are approaching retirement often ask us, “Now what?”

Their entire lives have been spent accumulating wealth and contributing to these plans. So, how do these resources get put into play? More importantly, how do we get the most out of the retirement savings you’ve accumulated within RRSPs and RRIFs?

You must convert your RRSP to a RRIF by December 31 of the year you reach 71, regardless of whether you need the income or not. Most people assume that you are better off to leave your money in an RRSP until you turn 71 and draw from other sources of income until you are forced to take from the RIF. However, this may not necessarily be the case.

These are the kinds of topics on which your Uncle John, your neighbour, and even your accountant like to weigh in on. There’s a good chance there’s some good advice within that deluge, but it probably won’t all be good advice. So, accept it with caution and talk to your financial advisor for the sake of your sanity and ours.

In this piece we’re going to wander through some potential pre- and post-retirement scenarios, but please note that this is not an exhaustive list of all circumstances that can result in taxable income. Tax law is constantly evolving, and people’s personal circumstances require differing and unique solutions.

There are many moving elements and situations for people. These can range from mundane to intricate, much like people’s lives and their financial landscape. If your situation gets described here, excellent! If not, it doesn’t mean there aren’t solutions. It doesn’t even mean there aren’t simple solutions! In either case, you should speak directly to a competent and qualified financial advisor before taking any action. We’re good, and we’ve been around the block a few times, but this information is general. If we could comprehensively cover every nuance of every financial picture for every individual’s needs – this would quickly turn into a very long and dull series of books.

These general guidelines are a wonderful place to start, but the planning process should also consider the more specific elements that are unique to you and your family.

So, all that being said, let’s begin at the beginning: An RRSP is an investment vehicle that allows you to save money for retirement in a tax-deferred manner. Meaning you save it while you’re working and being taxed at what is, presumably, a higher rate than you’ll find yourself in when you start using the funds.

Typically, an RRSP is transformed into a RRIF (Registered Retirement Income Fund) in December of the year you turn 71. It’s not obligatory to adjust your investment plan because of this shift, but a review of your financial plan is a sound idea. The move from RRSP to RRIF isn’t taxed; it only affects the account type.

Once your savings have been moved to the RRIF, you must begin taking out a minimum amount each year; RRIFs require an annual minimum distribution for tax purposes. At the end of the year, the annual market value determines how much must be withdrawn as a minimum withdrawal.

Now, you don’t have to wait until you’re 71. You can withdraw the money when you need it and when it makes sense for your financial plan. Many people begin to take money from their accounts to fund retirement in the year they retire. However, many people also wait until they are 71 or 72 years old before withdrawing from their RRIFs. Is it wiser to withdraw money from an RRSP or RRIF early or to wait until you’re in your 70s? We can’t say. Assessing your existing tax state and estimating your future tax condition is part of the process. That’s something only you and your financial advisor can decide.

Also worth noting, there is always a possibility these dates, and figures will vary with each federal election and budget cycle. We keep an eye on shifts of this nature for our clients to assess their plan with any adjustments made as needed. If you’re not working closely with an advisor, you should keep these changes in mind.

Most importantly, don’t succumb to the temptation of letting the tax tail wag the dog. Money is the most important thing you need to live comfortably. Work with your advisor to come up with a plan that works best for your life and lifestyle while mitigating tax consequences.

So, we’ve covered RRSPs and RRIFs. Now there’s CPP, Old Age Security, pensions, and investments. The goal is to determine how to best draw from whatever sources of income are available to you to meet your cash flow demand.

Once you start taking OAS, if your salary reaches a certain threshold – just shy of $80,000 – your payments may be subject to a clawback or a ‘recovery tax.’ The OAS benefit is reduced by 15% for every dollar over the threshold amount, so it is best to attempt to avoid the old-age security clawback whenever possible. To plan for this, we consider a variety of factors.

With the right strategy, informed by the right advice and a solid plan, you can continue to save money on taxes over the next several years. If you’re trying to save money *this* year, you’re missing out. The goal should be to minimise your entire tax cost while managing cash flow needs. Failing to plan forward and focusing solely on delaying current tax costs can result in a substantial estate burden in the long term. Sometimes that’s the intention, and the kids get what’s left over after everything else has been dealt with. If that’s not your plan, consider taking some money now to help minimise future costs as part of a broader strategy.

Steer clear of trying to avoid triggering any taxable income; resulting in a few years of low income, followed by years of high income. That’s not good planning. In the same vein, trying to cash out your RRSP before the age of 65 solely to minimise estate tax isn’t always the most outstanding choice either. Talk to someone you trust and look at the big picture. A good plan can make sure you approach this most advantageously for you and, if it’s important to you, for your beneficiaries.

So, to sum up, remember that RRSP funds can be transferred into a RRIF at any time. Cashing your RRIF out early or deferring pulling from a RRIF until you’re 72 is rarely the best decision. Most of the time, there’s a clever technique to be found somewhere in between. The only way to figure out what that is…is to make a plan. Asking for professional advice, talking to your advisors or to us, about how to draw income in retirement is the most important thing you can do. To help you make the most of your assets in retirement, we’ll share the knowledge and experience we’ve gained while working with thousands of clients who have faced these situations.

Ultimately, your uncle John is a successful man in his own right, but he is probably not a wholly reliable source of financial planning information. It’s a new era. Each person’s scenario is different, so your math may be different, too. Calculating what’s best for you can save you thousands of dollars.

That’s great news for everyone.