Drawing on your RRSP

When to start drawing on your RRSP

May 2016

I find most folks have a love hate relationship with RRSPs.The immediate tax deduction you receive for contributing is attractive and often a key reason for making a contribution. However, as many retirees have found out, when you withdraw the funds down the road it can create a tax burden. As such the timing of your RRSP withdrawal is important. 

You can withdraw money from your RRSP whenever you like.However conventional wisdom is to let the money build tax free and delay withdrawals. Often for retirees that means drawing on your TFSA or non-registered investments first. By the age of 71 you are forced to convert your RRSP, either into a registered annuity or more commonly into a registered retirement income fund (RRIF). The following year, when you are 72, you can no longer delay and are forced to start making withdrawals. The federal government has a schedule to determine your mandatory minimum withdrawal. It is based on age and at 72 the forced withdrawal is 5.40%. Meaning 5.40% of the balance of your RRIF must now be withdrawn and is fully taxed. That percentage does not sound like much, but it can be enough to push you into a new tax bracket. In addition to increased taxes the added income might trigger claw back of your Old Age Security, it could also reduce other income tested benefits. 

To help avoid the potential tax liability I encourage folks to withdraw from their RRSP when they are in the lowest tax bracket. This might mean converting to a RRIF early and starting withdrawals before they are mandatory. If you are near retirement or are already retired but have not started drawing on your RRSPs this is a strategy worth considering. It is ideally suited for folks who will be in a similar tax bracket or in a higher tax bracket down the road. The idea is to withdraw a little bit from your RRSP now, every year, leading up to the age of 72. The constant small withdrawals will minimize the size of your RRSP and reduce the impact of the mandatory minimum withdrawals that kick in at 72. Ideally you will withdraw just enough each year to stay within your current tax bracket, so you will minimize the taxon the withdrawal. For example if you have $42,000 of taxable income you could withdraw $3,000, which will reduce the size of your RRSP but will keep you below $45,282, which is the threshold for the next tax bracket, so you will not be pushed into a higher tax bracket.

Even if you do not need the funds it might still make sense to start withdrawing from your registered accounts early. If you are in a low tax bracket you can still get the money out of your RRSP with minimal tax and then reinvest it in a TFSA or non-registered account. The idea is to withdraw the funds when it is most tax efficient. 

As well if you are over the age of 65, withdrawals from your RRIF count as pension income, so the income can be split with a spouse and it also qualifies for the $2,000 pension tax credit. From 65 until the forced conversion pension splitting and the pension tax credit enhance the benefits of early withdrawals.

There are a number of factors to consider that might speedup or slow down the withdrawals from your RRSP. The best bet is to ensure you have a plan in place. 

Clinton Orr B.Comm(hons.), CIM, CFP, DMS, FMA  lives in Beausejour and is a portfolio manager with National Bank Financial.

This information transmitted is intended to provide general guidance on matters of interest for the personal use of the reader who accepts full responsibility for its use, and is not to be considered a definitive analysis of the law and factual situation of any particular individual or entity.  As such, it should not be used as a substitute for consultation with a professional accounting, tax, legal or other professional advisor. This commentary reflects my opinions alone, and may not reflect the views of National Bank Financial Group.