At this time of year, we normally focus on contributing to your RRSP to get those tax savings everybody loves.
However, once you've moved into retirement, focusing on when to withdraw your RRSPs/RRIFs can have a substantial impact on your tax situation.
For most individuals, your RRSP/RRIF is your biggest future tax liability and managing it accordingly can reap significant financial advantages. Early or accelerated withdrawals can trim down the amount of taxes you pay on those funds.
While most people are aware that you must convert your RRSP into an RRIF and receive a minimum payment before your 72nd birthday, there is nothing stopping you from accessing the funds before then.
This is particularly important if you have accumulated a large amount of RRSPs/RRIFs - unless you can transfer that tax-deferred to a spouse on death (or in a couple of other very limited exceptions), that amount will be taxed on your final return. Depending on your province of residence, you could be facing a 54% tax rate on some of those funds.
If you find yourself with a fairly large pool of RRSPs/RRIFs but your income is otherwise in the lowest federal tax bracket (up to $49,020 for 2022), it might be wise to accelerate withdrawals to ensure you pay tax on those funds at your lowest marginal rate.
Even if your income is into the second tax bracket, it might make sense to increase your withdrawals to bring your Net Income up to the OAS clawback threshold ($81,761 for 2022) and pay some tax in that bracket rather than defer it until later.
As we discussed in our Income Splitting post, RRIF withdrawals are eligible for Pension Income Splitting (if you are over 65), so it may be possible to use your spouse's tax brackets to get this income taxed at a lower rate.
We're not suggesting you need to spend those withdrawals - you can use them to top up your TFSA or invest in non-registered funds that receive better tax treatment on death.
Obviously, this is not a one-size-fits-all strategy, but if you find yourself in this situation, it's probably worth your time to have a conversation with your tax professional and/or investment advisor about managing that future tax liability.
This article originally appeared in Southwestern Tax Service's February Newsletter: https://conta.cc/3rGqCdH
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