Once you retire, it鈥檚 time to stop contributing to your RRSP and choose those investments to a RRIF (Registered Retirement Income Fund). Deciding when and how much to withdraw can have a significant impact on your long-term tax burden, says Dave Lee.
鈥淢any people don鈥檛 think about the tax on their RRIF account until it鈥檚 too late. Then they or their heirs can be faced with a daunting 53.5 per cent tax rate that could have been avoided with proper planning,鈥� says Dave, who helps clients at Scotia Wealth Management in White Rock.
The first thing to understand is that money in a RRIF account will be taxed as income on withdrawal. Money transferred between spouses is tax deferred but is still taxed when withdrawn or passed to children. Many people understand that naming a beneficiary on an RRIF bypasses probate, but it is an expensive mistake to think this also addresses the much larger cost of income tax.
鈥淚f a person has $1 million in an RRIF when they pass away, all of that money will count towards their income in the final year,鈥� Dave says. 鈥淒epending on other sources of income, the million dollar RRIF may be worth as little as $465,000 after the government takes their share. But if you plan, you may be left with a lot more to spend or give.鈥�
Timing is everything
Dave says it鈥檚 important to focus on getting the timing of withdrawals right, relative to other decisions and life events.
鈥淚deally you start RRIF withdrawals early, and you live a long time. That gives us a larger number of years to make withdrawals within lower tax brackets and ensure you keep as much of your savings as possible.鈥�
- Avoiding the OAS Clawback: If your taxable income exceeds $90,997 in 2024, any additional earnings result in an additional 鈥渞ecovery tax鈥� 鈥� commonly known as the OAS clawback. 鈥淟arge withdrawals from your RRIF after you鈥檝e started collecting OAS may trigger the clawback, but withdrawals prior to collecting OAS may help you keep more of your pension,鈥� Dave says.
- Anticipating inheritance: Most people expect their tax level to remain steady throughout retirement, but if you receive a sizeable inheritance, you may find that income from investing the inheritance results in a higher taxable income in your mid to late retirement years. This means RRIF withdrawals later in your retirement years could be taxed more heavily than in earlier years. 鈥淚f your taxable income is going to go up due to an inheritance or selling property, you may want to consider accelerating RRIF withdrawals,鈥� Dave says.
You have options
It is important to note that early or increased withdrawals from your RRIF doesn鈥檛 necessarily mean you have to spend this money. For some people, it just means you鈥檙e moving investments to a TFSA or a non-registered account where it鈥檚 available in case of emergency 鈥� without large tax penalties.
鈥淪ome of my clients see the benefit right away, while others are reluctant to give the government an extra cent today, even if it will mean less tax in the long run. We crunch the numbers, and clients decide what makes sense for them,鈥� Dave says.
There are other benefits to withdrawing funds from your RRIF early:
- Pension Tax Credit: For people who otherwise don鈥檛 qualify for the Pension Tax Credit, withdrawals from an RRIF can help you qualify.
- Income splitting: After age 65 RRIF withdrawals can be split with a spouse, which often provides more access to lower tax brackets.
- Charitable donations: Many people include charitable donations in their will, but spreading out that gift over a few years may have a bigger impact. 鈥淭he money you get back from the charitable donation tax credit may actually be greater than the tax you pay on withdrawal from your RRIF,鈥� Dave says. If you pull $100 out of your RRIF for charity when you鈥檙e in the 28 per cent tax bracket, you鈥檒l pay $28 in tax. A tax receipt donation is worth 49 percent for the same individual, so a $100 gift provides $49 back. That means you can give $100 to charity from your RRIF and still end up with $21 in your pocket!
Enjoying these articles? Visit to read more. Have a question? Contact Dave at 604.535.4743 or dave.lee@scotiawealth.com.
ScotiaMcLeod, a division of Scotia Capital Inc.