Source
r/PersonalFinanceCanada•
xceryx

Withdrawing RRSP

I am 40 and I make aroundn 90k a year. And have around 3M in RRSP. I am not able to maximize my TFSA. Would it make sense to withdraw RRSP every year as I seem to have way too much RRSP and pay down mortgage and maximize TFSA.

Assuming my cost of living is about 90k without mortgage payment or TFSA contribution.

My plan is to withdraw 100k every year, RRSP should still be enough for my retirement, so I can maximize my TFSA and pay down my mortgage. Does that sound right or I am missing anything?

Posted Dec 31, 2021, 10:49 AM UTC · edited

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hobanwash1•

Yeah I couldn’t understand anything after “3M in RRSP”

17
Purify5•

TSLA.

3
xceryxOP•

Amd

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StanTheMan123987•

Pics or it didn't happen.

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[deleted]•

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[deleted]

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BigCheapassBritish Columbia•

That is a terrible idea and monstrously tax inefficient.

Are you still contributing to RRSP? If so divert those funds to TFSA.

You could also consider retiring a bit early and drawing RRSP during those years as your only source of money. Then you could use some of that towards your TFSA.

Also keep in mind your RRSP will eventually be converted in an RRIF and you will be forced to withdraw a certain percentage annually.

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xceryxOP•

RRIF is exactly why I think it is probably a better idea to pay tax now.

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BigCheapassBritish Columbia•

With the amount of money you are working with here you should definitely talk to a professional. Spending a bit on a fee only consultation/setting up a plan could save you tens or hundreds of thousands in taxes.

Also on the topic of RRIF; You can open a RRIF anytime, but no later than the end of the year you turn 71.

When do you plan on retiring?

If you plan on retiring at say 55, it may be wise to start drawing your RRSP early.

Also you may want to structure your retirement in a way that minimizes OAS clawbacks. Though this might be a challenge. GIS certainly isn't in the cards, so I wouldn't worry about that.

I wouldn't use reddit to come up with your plan on this one. Please find a professional to help you out.

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xceryxOP•

Thanks, will look for professioanl consultation

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[deleted]•

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nothankyoumaybel8er•

Talk to an accountant.

It sounds like you're near the top tax bracket. There's no advantage to definitely paying 50% tax now, to avoid MAYBE paying 50% tax later. Maybe you lose your job in 5 years, and then you resort to using your RRSP in a more efficient way. I'd say keep it in there and let it compound tax free until you NEED that money, or you can pull it out at a better marginal tax rate.

Again, talk to an accountant about your specific scenario. They do this for a living.

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icebeers10•

Although you aren't wrong and I tend to agree with your thinking, there would be one advantage. The ability to generate more tax free revenue in your TFSA then if you never contributed at all. If you invest say $100k today and that grows to say $250k by retirement age, then you would have $150k more asset potential in your TFSA earning tax free returns versus the current scenario. And that additional $150k a year is available in perpetuity until you die.

Now also OP scenario is very specific and he should definitely talk to an accountant because he has specific circumstances that can make it perhaps beneficial to go against conventional wisdom.

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nothankyoumaybel8er•

Ok. So let's use your numbers. Assuming a 50% tax rate for simplicity here.

You take out 200k from rrsp to invest 100k in tfsa. You paid the 100k in taxes. You get a 250% return over the years. You're left with 250k tax free money. Sweet.

You leave that 200k in your rrsp. You get a 250% return over the years. You now how 500k You withdrawal 500k and pay 50% tax. You're left with 250k in tax free money. Sweet.

Taking it out now at a 50% tax rate ensures you pay that 50% tax rate. I'm suggesting you leave it in there and maybe the opportunity strikes that you can withdraw it in the future. For instance, if you lose your job and use the rrsp to replace income.

There's just no advantage to paying maximum tax now. It's locking in a loss. If you can pay less than maximum tax now, it starts to make sense.

I still suggest talking to an accountant, they can tell you at what threshold it starts/stops making sense for your specific scenario.

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icebeers10•

Well I did say I agree with most of what you said... However you said there were no advantages which simply isn't true.

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nothankyoumaybel8er•

There is no advantage to paying maximum tax now.

I'm all ears man. If you tell me why it's advantageous to pay the most possible tax now, I'll gladly listen.

I'm sure there's some scenario where if youre trying to avoid minimum withdrawal rates at 71 to benefit from OAS, that could make sense. But at a 3M portfolio at his age, it wouldn't make a difference.

I just don't see a scenario where it's beneficial. I would be more than happy for anyone to show me choosing to pay max marginal tax rate now is financially the best move.

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BlueberryExotic•

I'm going against the grain here a bit and would need to do the math in more detail with other info on your whole net worth but here are my thoughts.

If you have zero TFSAs you will have just over 80k in room in 2022. With 3M in your RRSP it will be growing at 150k at a conservative 5%. So I say just go for it and take the "tax hit".

Why? Because while yes you need to be smart about managing your tax with such a large portfolio, there is no way to completely avoid tax. The best you can do is quit work and draw down the money but even if you took out your current salary the RRSP would still be growing. At some point, either now or in the future you will have to withdraw more, far more, than it is earning annually to actually draw it down. This value will likely be well above 150k if not 300k so you are in the top tax bracket anyway.

Tax here is not a "bad thing". It means you killed it in the market and while it would most definitely have been better in a TFSA from the start, well it wasnt so this is your hand to play.

I guess your other option is to do nothing and just contribute your income into your TFSA. At age 50 your RRSP will be 6M and you'll have the same "problem" you have now, at 60 it would be even "worse". If I were you I'd give myself a salary increase now to 150-200k and just pay tax as if that was all earned money. Your RRSP will continue to grow and your quality of life for the next 20 years will be even better.

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BlueberryExotic•

No worries. Big numbers like this mess with peoples minds and rules of thumb for the masses no longer apply in the same way.

It is probably worth your time and money to see a CPA and fee only financial planner to come up with an actual multi year plan.

Only other thing I'd add is however you got to 3 million is probably "high risk" so you may want to look at portfolio diversification or reassessing risk because while tax is a bummer you could lose 90% on a high risk investment much more easily.

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xceryxOP•

My issue is that I can't contribute to my TFSA and mortgage principle of I don't withdraw the RRSP.

It would make sense to withdraw from Rrsp to invest in tax free sheltering vehicle. Thanks for your help.

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BlueberryExotic•

I mean you don't really need to contribute to your RRSP anymore, so that should free up some money.

You have options with this, all with pros and cons. In my mind taking an extra 50-100k per year from your RRSP to boost your TFSA and pay off your mortgage sooner to be totally debt free is a decent compromise and will increase your quality of life now vs just in retirement.

Like I said before you may need to check your overall level of risk. If your plan is to max out your TFSA in high risk stocks to just avoid tax on another big windfall then that is a bad idea. You already have 3M, you did it, you're done, you just need to manage it well and you are set.

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xceryxOP•

Thank you for your kind words.

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Gruff403•

Talk to the pros for sure but if you stop employment and use your RRSP as your income now you can actually create a larger net pay.

If your gross income is 90K, as an employee you have to pay CPP, EI and taxes. In Ontario that comes out to about 23 433 leaving 66 557 net pay. The effective tax rate on every dollar is 23 433/90K = 26%

If your only source of income is your RRSP, that same 90K has tax only applied of 20 460 leaving 69 540 net pay. You no longer pay CPP or EI. The effective tax rate on every dollar is 20 460/90K = 22.7%

You can literally make more money and pay less tax by switching the source of income from employment to RRSP. That makes you real close to being able to stop work now and be financially independent.

You could easily draw 100K from RRSP with 2% annual inflation adjustment and 4% annualized return and never run out of money. At age 80 you would be drawing out over 200K annually.

Pay for a fee only planner and get some professional advice, stop contributing to RRSP and start filling TFSA, create an income target (budget) and see if you can get there using your current assets and you may not have to go back to work next week.

Here's some calculators to play with:

https://www.wealthsimple.com/en-ca/tool/tax-calculator/ontario

https://www.taxtips.ca/calculators/rrsp-rrif/rrsp-rrif-withdrawal-calculator.htm

6
aughhhhh•

No matter how onerous your assumptions about taxes and rates of return, spending only $100k yearly from a $3M portfolio will result in your drowning in soooo much $wealth that optimizing the RRSP's tax on draws is immaterial.

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BlueberryExotic•

You are totally right but I think this is the first time I have seen you not give the mathematical optimal solution! People have a hard time with big numbers like this. 30k extra in tax isn't really pushing the needle much for the OP but that's incomprehensible for most people.

The OP seems to be high risk so that is going to be their challenge going forward. They have a great problem but need to change their mentality.

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Wise-Ad-1998•

Other than the fact you will be throwing away 30k every year … plus having to paying taxes on 190k every instead of 90…

It would prob work out!

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BlueberryExotic•

This is not a normal situation. Sure withdrawing 100k now increases their tax but if they do nothing they could easily have 10M+ by age 55-60. So what then? Like 80% of their RRIF withdrawals at age 60 would be in the highest marginal bracket anyway.

They can't avoid tax either way. The only "solution would be to stop working now and withdraw their current salary. I see little wrong with withdrawing 50-100k now as if it was a salary increase if they want to increase their lifestyle for the next 20 years while still having probably 4-5M in their RRSP when they retire.

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xceryxOP•

Thanks, I understand the marginal tax rate is 45% to 50%. I have kids, so it makes sense to tap into RRSP now to maximize TFSA as income tax is likely to increase over years as well.

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DonArcher007•

As Wise-ad-1998 just said above, it only makes sense if you want to throw a bunch of money away.

4
random604•

Having kids complicates it further, the Canada Child Benefit is calculated on net income, RRSP withdrawals will reduce or likely eliminate the CCB you are currently receiving. Depending on the ages and number of kids I would suggest withdrawing $1 million in one year rather than $100,000 per year over 10 years. You'll lose about $500k to tax and your CCB for one year but the next year CCB will be back and you can fill up your TFSA and pay towards mortgage.

$2 million will still be a healthy RRSP (don't leave all as one stock).

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7MillnMan•

You’re 40 and you have 3M on RRSP? You only make 90K/yr.? Is this yours only or combine with your wife? Talk to a financial advisor. So much to discuss.

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xceryxOP•

I am the only bread winner of the family.

All the asset I have is purely on investment.

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7MillnMan•

I’m puzzled with the amount base on your income. Max RRSP in 2020-2021 is around $27,800. I’ll round it off to $28,000. If you started working at 20 and invest $28,000 every single year with a return of 14.5 % compounded will give you a total of 3M. It’s either you’re related to Warren Buffet or you have a crystal ball. Spousal contribution??

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xceryxOP•

I bought amd at 4 as average costs.

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7MillnMan•

Did you buy AMD on margin?

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StanTheMan123987•

Guess you forgot about the TSLA run up...

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Training_Exit_5849•

Have you heard of spousal rrsp?

If you put a lump sum into a spousal rrsp (not spouse's rrsp), and take it out in 3+ years without any contributions in between the 3 years, it will be taxed at your spouse's tax rate.

So personally I would max out the TFSA first, and if you have contribution room left over, then do the spousal RRSP in a lump sum, and contribute future contributions to the spousal rrsp, if not, just contribute future RRSP payment to the spousal RRSP.

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xceryxOP•

Thanks for you reply.

I won't be able to contribute much to Rrsp as my income barely covers living expense of my family.

I have been renting in the past 8 years and my income barely breaks even. I need additional income to pay down mortgage principle and contribute to TFSA and RRSP is the only thing I think it makes sense without sacrificing my life style dramatically.

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Training_Exit_5849•

Spousal rrsp gets you the same tax refund as contributing to your own regular rrsp, except upon withdrawal, it's taxed at your wife's tax rate instead of yours.

Your current problem now (if I understand correctly) is that you have too much balance in your own RRSP, so if left as is, it will likely put you at a higher tax bracket when you retire which basically nulls the purpose of a RRSP. So in order to prevent you maxing out on your end, you contribute future payments to a spousal rrsp instead of your own (reminder, not her own rrsp). That way, you get the tax deferral, but you divert the balance of the rrsp to your wife so when you withdraw it's not solely focused on your bracket, but hers as well.

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Janus1788•

I say just max out your tfsa. The tax you get dinged on for the rrsp withdrawal is a reasonable amount but long run not consequential. But of course go talk to a professional because I'm just a random guy on Reddit

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xceryxOP•

Yeah..so the idea is really that take RRSP tax and put it on TFSA and Primary residence as they are tax free.

Thanks.

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hobanwash1•

Just my narrow view of the world, and not knowing the details of your mortgage and expenses, but have you considered early retirement? 3M at a 4% withdrawal rate is 120k before taxes. Or maybe that’s your plan, just need a few finishing touches?

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xceryxOP•

Yeah. My wife was driving me crazy at home. Need a fulfilling job to keep my sanity.

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hobanwash1•

Understood. And well done!

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xceryxOP•

Thanks for your understanding and encouragement.

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hammer_416•

This actually is a good example of why one always needs to max the tfsa first. OP has cost themselves the OAS and GIS, one could say that's peanuts when you have that kinda portfolio/income. But it is "free" money others will get, that they are now ineligible for.

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whateverthefucks•

I think one thing people don’t realize on this sub is that investing in RRSP can incentivize holding stocks for the long term. If OP was trading in his TFSA he might have cashed out way earlier before reaching the 3M mark. But since these were in his RRSP, there is no incentive to cash out because that money is locked in anyways. Might as well just let it grow tax free.

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rupert1920•

Would it make sense to withdraw RRSP every year as I seem to have way too much RRSP and pay down mortgage and maximize TFSA.

My question is why do you think you need to withdraw from RRSP to contribute TFSA? What benefits do you foresee by doing that?

In other words, what do you think you're gaining in TFSA that you're not getting by having money in RRSP?

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xceryxOP•

Tax free?

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DetroitLions69•

But you’re getting fucked 30% on every withdrawal. It’s an awful idea man

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BlueberryExotic•

How so? That 30% withholding goes towards the income tax so it's NOT and additional penalty. If OP withdrew 100k extra they will simply pay tax for the year on 190k income and still wouldn't be in the highest marginal tax bracket.

The only way I see to pay less tax on this money is to retire now. OP may be happy to keep working and just wants to increase the quality of life for the next 20 years. He didn't suggest a withdrawal of 2M in a lump sum.

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xceryxOP•

Will get fucked anyway if I withdraw later on. At least TFSA gain won't be taxed like that.

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rupert1920•

You "get fucked" way worse later on since you most likely will withdrawal at a lower tax bracket.

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DetroitLions69•

You are making a horrible decision but you do you

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rupert1920•

Your RRSP grows tax free as well. (Edit: *Effectively tax-free, if you've done proper accounting of your contribution and tax return. The nominal tax you pay upon withdrawal is offset by your tax return, if it were invested instead of spent to buy a new flat screen or something. See linked paper.)

The taxes you "saved" upon contribution is subtracted upon withdrawal. Since your money is in your RRSP already, whether you withdraw now or later doesn't matter. It is worse now since you're forcing taxation on a higher tax bracket.

Check out this paper on an analysis of RRSP vs TFSA.

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xceryxOP•

Nah RRSP is tax defered. You still pay income tax ehen you withdraw.

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rupert1920•

See edit and the paper.

The income tax you pay is completely offset by the tax return you receive upon contribution. If you have invested the tax return appropriately an RRSP behaves exactly like a TFSA, if contribution tax rate = withdrawal tax rate.

In your case regardless of what you did with the tax return, the fact is that your RRSP is before-tax money. By thinking that you "pay income tax" you're just counting money that isn't yours, which is why you think you "get fucked" either way. No, the account is just nominally bigger because the government has loaned you money in the form of a tax return. Your actual portion of the account is smaller, and it doesn't matter whether you withdraw now or later if the withdrawal tax bracket is identical. You're making it worse because you're withdrawing in a very high tax bracket now.

Take a look at the paper I linked, it explains everything in detail.

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Professor-CPA•

You'll have to get someone to run the numbers but you'll probably pay more tax to do that now than you'll pay when you retire because of your 90k income.

You could stop contributing to the RRSP and instead contribute to the TFSA.

You could retire say 5-10 years early and start drawing the RRSP as your sole source of income at that time.

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BlueberryExotic•

So retire in 10 years at 50yo with a 7.5M+ RRSP? They would be drawing down 375k a year at just 5%. So they have the same quality of life for the next 10 years, and then go up 4x in early retirement to still pay the top marginal rate on like 70% of their withdrawals.

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DonArcher007•

So you're going to work til you're 71? why wouldn't you leave the RSP, then live off withdrawals from retirement time until you have to convert the rest to a RIF ?

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xceryxOP•

Wife drives me crazy.

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[deleted]•

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[deleted]•

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guppsala•

Having that large of sum in a RRSP is a major tax challenge . Worst case is death which assumes that you withdraw the 3M$ instantly at death and pay 50%+ tax on it ( unless transferred to spouse ). Fee only financial planner is your best bet

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t3m3r1t4Ontario•

Sell enough to hold a mortgage in your RRSP and buy a house.

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AdditionalCry6534•

I would consider taking some tax hits now and pay down mortgage (not going to be a popular opinion given most here would recommend borrowing to invest). Maybe withdraw up to the limit of the next tax bracket each year for a few years.

You have more than enough RRSP for retirement and will be withdrawing in a high tax bracket in retirement.

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AdditionalCry6534•

I would say withdraw some today, to get it out in the 2021 tax year. And keep withdrawing about $50k per year going forward.

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