RRSPs & RRIFs: Be Aware of Taxable Withdrawals

February 5, 2024

As the cost of living has risen substantially over the past couple of years, some may consider accessing funds from the Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF). Yet, early withdrawals may be costly. Here are two reasons why:

Tax Implications — Consider that any withdrawal is subject to tax and must be reported as income on a tax return. For the RRSP and any RRIF amounts above the required minimum withdrawal, there is also an immediate withholding tax. If you are accessing funds to pay down short-term debt, you may end up paying more tax on the withdrawal than you’ll save in interest costs.

For RRSP holders, early withdrawals may have additional tax implications. If your current income is higher today than in the future, you may be paying higher taxes today. You will also forego the opportunity for continued tax-deferred compounding, perhaps the most beneficial aspect of the RRSP: A 35-year-old who withdraws $18,000 from the RRSP would have $100,000 less in retirement savings by age 65 at an annual return of 6 percent. Notably, once you make a withdrawal, you won’t be able to get back the valuable contribution room.

Asset Values — Market volatility in 2023 put many asset values under pressure. Keeping funds within these plans can be beneficial to allow asset prices to recover.

RRSP Withdrawals: Alternatives to Consider

For those saving for retirement, if funds are needed, consider accessing other accounts, such as the TFSA, where contribution room resets itself at the start of each year (i.e., a withdrawal amount will be added back to contribution room in the following year). Consider also that the RRSP may allow for tax-free withdrawals and recontribution for qualified home purchases or educational purposes via the Home Buyers’ Plan or Lifelong Learning Plan. For more information, contact the office.

RRIF Withdrawals: Ways to Minimize the Impact

For those in retirement, allowing funds to remain in the RRIF may be challenging since minimum withdrawals are required each year. However, here are some ways to minimize the impact:

Withdraw at the end of the year — This may allow greater time for asset values to recover. Making withdrawals at the end of each year also allows for a longer period for potential growth within the plan.

Make an “in-kind” withdrawal — If you aren’t in need of funds, with an “in-kind” withdrawal for the required amount you will continue to own the security. While the fair market value at the time of withdrawal will be considered income on a tax return, if transferred to a TFSA (subject to available room), any future gains will not be subject to tax.

Split RRIF income with a spouse — RRIF income qualifies as eligible pension income for pension income splitting. If you have a lower-income spouse and you’re 65 or older, you can split up to 50 percent of your RRIF income to reduce your combined tax bill.

If you are turning age 71 in 2024, here are additional options:

Make the first withdrawal next year — You aren’t required to make a withdrawal in the year that the RRIF is opened. You can wait until the end of 2025, the year in which you turn 72, to make the first withdrawal.

Base withdrawals on a younger spouse’s age — If you have a younger spouse, use their age to result in a lower minimum withdrawal rate. This can only be done when first setting up the RRIF, so plan ahead.

Key Dates: Don’t Overlook the Opportunity for Tax-Advantaged Growth

RRSP Deadline: February 29, 2024, for the 2023 tax year, limited to 18 percent of the previous year’s earned income to a maximum of $30,780.

2024 TFSA Dollar Limit: $7,000, for a total eligible lifetime TFSA contribution amount of $95,000.

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