Learn to make RRSP withdrawals with confidence
TERRY MCBRIDE
Once you have accumulated savings in an RRSP, how do you get your money out? There are lots of ways.
Normal retirement income
Normally, when you retire, you would convert your RRSP to either a Registered Retirement Income Fund (RRIF) or else you could buy an RRSP annuity.
Many retirees like taking equal monthly RRIF withdrawals for as long as possible, making occasional cost of living adjustments or lump sum withdrawals. You can easily deplete your RRIF if your spending level is not sustainable. Other retirees, who have a company pension, will try to prolong their RRIF tax deferral by withdrawing only the mandatory minimum amount each year.
An RRSP annuity, on the other hand, is a contract with a life insurance company that pays you a fixed dollar amount each month, or each year, no matter how long you live. Your rate of return effectively increases as you outlive the average life expectancy.
If you have enough RRSP savings, you could compromise. You could use some of your savings to buy an RRSP annuity to cover basic living expenses. Then, convert the rest of your RRSP into a RRIF, to allow you the flexibility of choosing withdrawal amounts as well as the kind of investments to hold.
Tax credits For the year you turn 65 you can claim the pension credit, which greatly reduces the income tax on the first $2,000 of RRIF or RRSP annuity income. You cannot claim the pension credit for making ordinary RRSP withdrawals.
As well, if you are married or living common-law, you can use pension splitting to further reduce your tax bill on RRIF withdrawals and RRSP annuity income, once you are 65. Therefore, consider converting some of your RRSP to either a RRIF or annuity, early in the year you turn 65, especially if you are not receiving any employer pension plan benefits.
Home Buyers Plan If you are planning to use RRSP savings to buy your first home, you can use form T1036 to request permission to withdraw up to $25,000 from your RRSP without paying income tax. However, as a condition of making this “tax-free” Home Buyers Plan withdrawal you will be asked to repay 1/15 of the total amount you withdrew, until the full amount is repaid to your RRSP. Your repayment period starts in the second year following the year you made your HBP withdrawal. If you fail to make the scheduled repayment you will have to pay income tax on the amount you failed to repay.
Removal of excess Those who eagerly maximize RRSP contributions as soon as possible each year may accidentally deposit too much into their RRSPS. There is a harsh one-percent-per-month penalty for over-contributing by more than $2,000 that may force you to withdraw those excess contributions.
There are basically two ways to get back onside. You can obtain authorization to remove excess contributions by using form T3012 to avoid the need for income tax to be withheld. Otherwise, you can make an ordinary withdrawal that has income tax withheld, and use form T746 to calculate how much to claim as an offsetting deduction.
Other deductions If you use money from your RRSP to start a new business venture, then claiming the startup costs as business expenses may nicely offset the tax owing on your RRSP withdrawals.
Similarly you might use carrying charges to offset fully taxable RRSP income. For example, if you borrow to buy stocks to generate dividend income, then you’d claim your investment loan interest expense as a taxdeductible carrying charge. However, deliberately using money withdrawn from your RRSP to make loan payments is a risky strategy, which is not suitable for most retirees.