Case Study: Drawing Down Your RRIF Tax-efficiently



Reg Sangha

Associate Financial Advisor


Many of you of have undoubtedly heard the saying from Benjamin Franklin in 1789, “In this world nothing can be said to be certain, except death and taxes.” He was not the first to utter those words nor will he be the last.

We still make that reference in our day-to-day lives. As financial advisors, our conversations with clients lead to these two inevitable topics.

Statistics provide us with mortality rates and average lifespan, but we can’t predict when someone will pass away. However, we can plan to minimize lifetime taxes.

In 1957, Canada was given one of the greatest investment planning tools – the RRSP. Over the past 65 years, Canadians have had the opportunity to accumulate wealth in an RRSP and defer the income taxes they owe on those contributions until they begin withdrawing the money.

Many Canadians have accumulated large RRSP balances as they approach the age of 71, when they must convert their RRSP to a RRIF (or life annuity), with withdrawals and paying income tax beginning the following year. As planners, we often find that client withdrawals will not exhaust the RRIF plan during their lifetimes. As a result, the concern becomes the potential of dying with a large RRIF balance.

The good news is that with some planning, we can potentially lower a client’s lifetime tax burden.

Depending on such factors as marital status, account balance, and age, it may make sense to consider taking more than the required minimum payment each year.
Take the case of David and Jennifer, who are married, both age 80, with total RRIF assets of $900,000 ($700,000 David, $200,000 Jennifer).

At age 80, the government requires them to withdraw 6.82% of the beginning account balance of the RRIF that year. This amounts to $47,740 (David) and $13,640 (Jennifer).

Layer in the fact that both qualify for near the maximum CPP and OAS benefits, which pay them a combined $45,000 per year ($22,500 each).

Jennifer has a defined benefit pension plan that pays her $25,000 annually.

Their gross income: David – $70,240 (RRIF withdrawal, CPP/OAS)

Jennifer – $61,140 (RRIF withdrawal, teachers’ pension, CPP/OAS)

Combined gross income – $131,380. They both fall into the 28.2% tax bracket – combining federal and BC tax rates.

Let’s take a moment to lay out what would happen if David were to die tomorrow.

As a married couple, David can name Jennifer as successor annuitant on his RRIF. This means when he dies, his RRIF assets roll over to Jennifer and continue to be tax-sheltered until she dies or draws out the funds.

Jennifer would then become the sole owner of the entire RRIF ($900,000). Income in future years would be taxed solely in Jennifer’s hands. She would report income on the entire RRIF payment, CPP, OAS, and her pension. This would put her into a much higher tax bracket than before.

Upon Jennifer’s death, assets in the RRIF would pass along to either her estate or named beneficiaries on her account. Unless she remarries, the RRIF balance at her death is added to her taxable income in the year of death. If the balance remains high, much of it will be taxed in the top tax bracket – currently 53.5% in BC.

Let’s return to their current situation. At the moment, David and Jennifer, being a couple, are in an ideal position given their ability to split income under Canadian tax rules.
David and Jennifer strongly believe that they should receive their full allotment of Old Age Security payments each year and not be put in a position of having OAS clawed back (for 2022 this begins at $81,761 of income per person).

Therefore, targeted combined family income would be around $160,000 annually. Going back to their combined gross income above, this leaves us with roughly $30,000 of income we can add each year.

Given David’s RRIF balance is the larger one, we target the additional $30,000 of income from his account, making the total RRIF withdrawal for David in the year $77,740. While the income tax slip will be issued in David’s name, remember, as a couple they can split RRIF income. David will want to split $20,000 of the RRIF income with Jennifer. The resulting gross income for each becomes:

David – $80,240 ($77,740 + $22,500 - $20,000)

Jennifer – $81,140 ($13,640 + $25,000 + $22,500 + $20,000)

They continue to pay taxes in the 28.2% bracket while receiving their maximum OAS payment and the RRIF balance is drawn down more quickly over the coming years.
Lifetime taxes (including annual taxes + tax on estate) in this scenario if they both live to age 90 would be:

Taking minimum payments – $519,861

Increase payments by $30,000 annually – $414,420

If they live past age 90, the difference of $105,441 means there is more for them in their later years and/or more for their heirs to receive once they are gone.

Each case is unique. There are several factors that go into how quickly the RRIF should be drawn down. Consult with your RGF Financial Advisor and accountant to see if this situation may be beneficial to you. ■

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