The RRSP Meltdown | A Simple Strategy That Saves Thousands
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- Опубліковано 27 чер 2024
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The RRSP Meltdown is a must have strategy in any retirement plan. Withdrawing from your RRSP aggressively early on in retirement will not only reduce your tax bill, but it will also create more flexibility should anything unexpected come up.
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0:00 - Intro
1:22 - Scenario One
6:08 - Scenario Two
This presentation is intended for information purposes only and does not constitute an offer to buy or sell our products or services nor is it intended as investment and/or financial advice on any subject matter. Every effort has been made to ensure the accuracy of its contents. Certain of the statements made may contain forward-looking statements, which involve known and unknown risk, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Returns are not guaranteed and past performance may not be repeated.
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DISCLAIMER: The videos and opinions on this channel are for informational and educational purposes only and do not constitute investment advice. Adam Bornn is not registered to provide investment advice and as such does not provide recommendations - those looking for investment advice should seek out a registered professional. Adam is not responsible for investment actions taken by viewers and his content should not be used as a basis for investment trades.
Also (if this hasn’t already been mentioned) a TFSA is outside a person’s estate, therefore it is immediately closed and distributed to your beneficiaries. I’ve been an estate executor twice in recent years/months and very much appreciate this part of the process.
WEll done again Adam, I forwarded this on to my executor for his awareness. 🙏🙏 🇨🇦
I retiring at 61 with $300k in RRSP, $450,000 from an inheritance and $100k in my TSFA and my financial advisor wants me to take my CPP now and not touch my RRSP until 72 when I convert it to a RRIF. I don’t agree with him as I,m sure I can hold off my CPP to at least 65 if not 70. When my dad passed at 83 he left $100k in his RRIF and he was taxed heavily and this was a mistake I’m wishing not to repeat again.
Thanks for this. It is an area I am very interested in.
Finally!!!!! I get why you have been suggesting the RRSP meltdown in combination with the CPP delay until 70. It makes total sense. But as you said, everyone is different. Having a Defined Benefit pension is great but if I start my meltdown at 60 and use the same numbers as you I'll end up with a marginal tax rate of 43.4%. I went back to work full-time for part of the year as well so I'll have to add another $50,000 into my income. If I'm going to meltdown my RRSP I'll be forced into permanent full time retirement.
I think my only solution is buying a sports car, because if I get a younger girlfriend I'll end up with a premature death!
OMG.....really funny! Thanks ... I didn't see the ending coming! Too funny!!☺ 👍 🇨🇦
I understand the meltdown a lot better now. Thanks Adam.
Great advice again! I have watched many of your videos. Clear. Interesting. Educational. Wish I would have found this or similar 10-15 years ago.
the only flaw in this strategy is you never know how long you gonna live
It's more about moving money from your RIFF to another non-tax forgiving account in the most tax-efficient way.
Taking money from your RIFF does not mean you need to spend it in the calender year. Can simply transfer it to another type of investment account while minimizing your taxes from withdrawals.
Great video. I would also like to see video done with in their 50s n still working n using a loan to meltdown rrsp before rrif mandatory start date. Thanks Derek
Thanks for the video Adam ! I'll be 65 in November. I had to retire at the end of 2021, when I closed down my small business, due to some health issues. I started taking CPP in May 2020. All my registered funds, plus my TFSA are invested in real estate. All those are in a cash position. I also started taking money out of my LIF. So between my CPP & LIF per month, that's roughly $1160 / month of income and that's the only income. My guess is that maybe I should be doing an RRSP meltdown, taking the tax implications into account
I want to thank you for your great content. I have been following you for a while now and appreciate what you do. Your content has helped me see that a career as an Advisor is what I want and what I am passionate about. I am now working through the education side to do this.
Jason, that's amazing to hear. All the best through that journey!
Adam, appreciate the layering of building onto another vid to continue the story to give an over all view of how things are connected. This laddering of rrsp or rrif, definitely got the message that if an rrsp or rrif is totally in investments that give a dividend....to ladder it down the dividends will have to stop and selling gradually some of the stocks will have to take place. Whoosh! That will be something you have described as "getting used to spending and no longer saving." So a person takes out the age related percentage amount, no taxation penalty, adds that to ones income-which is subject to being taxed as income, and if any money is available from pulling the amount out from the rrsp or rrif, put it into the TFSA and start building up the TFSA . Very interesting....I really enjoy watching how your program works! 👍
Don't have to sell and not collect dividends, just move from registered to non registered.
@@ParallelWealth Yes, I did some research tonight and did find that a person can transfer stocks from rrsp/rrif to a non rrsp. Keeping in mind to stay within the rrsp minimum amount so as to prevent any withholding tax that would happen in the rrsp/rrif. Good to know this option. Peace of mind is a great gift👍 As a few other comments added as a conundrum, tax liability increases because the minimum amount gets added to taxable income and coincidentally, if it a stock that generates dividends, the dividends cause more taxable income.....and yes, even making sure to make maximum yearly contributions to the TFSA, the tax liability is still present. I guess it is about managing as best one can the "tax liability beast." A few other ways are to delay both OAS and CPP to 70, while gradually moving dividend paying stocks out of registered to non registered and making maximum contributions to the TFSA every year so to buy more dividend paying stocks to keep the TFSA growing for emergencies and later in life. Managing the Tax Liability Beast as best one can. Thanks Adam....really good comments from the viewers on this topic too. 💯☺
@@ParallelWealth Right! And, withdrawing from a RRIF doesn’t mean I have to spend it (TFSA contribution, emergency fund, gift with warm hands…)
Combine this strategy with the laddered income is the key, no doubt Adam. Yes everyone is different, in my case (63) it's complementing my defined benefit plan/RIFF income with a bit of TFSA until I'm 65, at which time (live in Quebec) I can maximize income splitting with my spouse who has no income/savings. Thousands of $$ tax savings. This approach will optomize my tax savings until 65 and beyond, while still maintaing a laddered income. I would then start to replenish the TFSA at 65 with any income that I haven't spent in my Go Go phase.
Excellent !
Thank you! Cheers!
Great advice
Thanks Brian.
This is good advice. A plan on how much and when to "de-register" money is absoletely required.. My mother is 92. My past father didn't want to "de-register" his RRSPs early and today we are struggling to get the RRSP money out in a tax efficient way.
All too common!
For someone retiring earlier: say 50 - should they still try to melt their RRSP... perhaps at a rate faster than needed for living expenses? I'm looking at Ontario's first bracket (up to $49231 in 2023?) - if they only needed say $36k/year to live on they'd still want to pull that $49k... even if they ended up pouring that surplus back into a margin account? I thought it would always be better to pull as little as possible: but I think you're saying to max low brackets early so your RRIF doesn't force high brackets later? I'm going to need to do more Googling. Thanks for the video!
Thanks Adam for sharing this information. This is very helpful to plan ahead of the retirement. What about if we defer both CPP and OAS to age of 70 and utilize the RRSP meltdown more aggressively? So we can capture the additional increase of gov’t benefit after. Thanks.
Great thinking!
Yup...that is how you do it! 👍💯 💡$. 🇨🇦
Have to factor in the fees to the financial advisor. A percentage of your portfolio or whatever.
Great video. Thanks for debunking the myth that your money is growing "tax free" in a registered plan. I've been winding down our RRIFs at an aggressive pace so as to have them closed when I hit 80 which is in 6 more years. I started withdrawing when I retired at age 55 before they were converted to RRIFs. I converted my RRSP to a RRIF the year I hit 65 so as to be able to transfer 50% to my wife's tax return. She did not work outside the home. I am always amazed when I see people like Gordon Pape recommend that people never take more than the minimum from their RRIF because by doing so they will pay more tax than necessary and the money is compounding "tax free" in the RRIF". He should know better than that.
I find the logic to be sound and compelling. However the true tax savings may be overstated . We are looking at tax payouts over a considerable period of time and comparing front end loaded to back end loaded . In any scenario back end loaded would appear to be more expensive because of inflation even when as a percentage of assets or income they may not be . We may have some apples and oranges because we are looking at the differences in todays dollars when they are not . In my view in order to get a clear understanding of the true difference one would need to run the simulation with 0% inflation . I would be interested to know the result .
Problem I see is the withholding tax of 30%. Yes you may get a fair chunk back at tax time but before that you’re only left with 21 k out of 30 k. That would definitely be a shortfall causing withdrawals from the tfsa to be able to survive.
If tfsa is maxed out, you putting extra meltdown in non reg, then you pay tax on that. Does melting down quicker work still max sense?
Thank you. I see that RRSP withdrawal is set to fixed amounts 30k, then 20k, etc. Should not real withdrawal take into account investment return?
What do I care what my estate will pay in tax after I die? That should not really be included in the total tax burden calculation. It does not effect this couple when they are alive at all. It affect only their kids potentially. What I want to see is the total tax burden a year before I die in the scenarios.
Looking forward to the next vid. Laddering is key for me. As always, though it’s tax efficiency which is my North Star. I’ve yet to figure out how one ladders income streams and pays less tax at the same time. It seems to me that’s impossible.
We do hundreds of plans and have been able to do for all - so it is possible!
If you have a DB pension, your "bridge" portion stops at the CPP first year point. So if you decide to Not take CPP to replace the "bridge amount" your income looks to be reduced...BUT that is where the magic of laddering or drawing down your RRSP comes into play. To replace some or all of the bridge portion of your DB pension you start taking out from your RRSP, within the maximum amount allowed based on your age. Since the Maximum allowed from the RRSP is most likely a lot less than your "bridge amount" you will be receiving less income, which means less tax. I hope I got that right...Adam would you like to chime in on this for any erroneous thinking on my part? 🤔 ☺🇨🇦
@@MegsCarpentry-lovedogs I began melting down my RRSP (RRIF) last year. I will increase my annual withdrawals threefold when my bridge ends at 65 (I’m 58) until my 70. At 70 my RRIF will disappear. OAS at 65 and CPP at 70 will exceed my bridge. So my tax liability will of course increase AND I’ll be subject to the clawback. The thing is, I retired ‘early’ at 56 and am not yet eligible for the age-related tax deductions that kick in at 65. (But earn too much to benefit from any tax credits or any other goodies etc.). My comment was such that, TSFA aside, the more you earn, the more you pay. Duh! It’d be nice to shift my higher earning years as a retiree from my sixties/seventies to my fifties without adding to my tax liability. That’s my conundrum. But it’s a nice one to have nonetheless.
@@ParallelWealth have booked a call in early May.
@@murraytown4 Ah! I understand a bit more of what your situation is about. Indeed, a nice conundrum to have. I see you have a call booked in May with Adam. Good one👍. I am not 65 yet but have a similar conundrum with paying a lot of taxes, a high tax liability. In watching Adams vids on how to reduce taxes, the one that fit my situation was to donate and get the tax credit. You will feel a lot better once you have that call with Parallel wealth. Hang in there Murray Town☺
excellent video...but as others have already noted, everyone's situation is different...I would love to see this modelled with DBP and other pensions, as mentioned below, once you do that, the marginal tax rate jumps up drastically and the numbers then make it not logical to use this strategy...Adam, I'm curious, you mention in the video that no matter what plan you have seen, this methodology makes sense...can you do one that shows a healthy DB and other pensions that impact this...also, for one that retires early, like 55.
Yes we will do a video like this soon - will show you that it works regardless of situation. Even situation ia different, so exact numbers will vary, but concept stays the same
Can you also do a video with an example of a single person without a private pension. And those who retire early ie around 55
If you are going to do another video on this could you talk more about why this works for most portfolios? Specifically what is the logic and what the benefits and drawbacks are to using it? That might help others determine if it would work for them. For me when I look at my plan end after-tax amounts...the RRSP withdrawal first is 8% lower than taking the non-registered withdrawal first.
What about if I take CPP at 60 and INVEST that money and get a 5% return on it (vs. waiting until 65 or 70 and getting NOTHING from CPP during those years). No one seems to put THAT type of calculations into their tables.
Sir,may i know if this is correct that i have this benefit fund from my late husband Job,a nd i only have $80.59
And still they witheld $24.16 and so i only recieve $56.41 a month is this correct that i still have to pay witholding tax ?
Adam, have you done a video on retirement funding issues for couples with a significant age difference? I'm 66 and retired, my wife is 59 and I am struggling with whether she should continue working or not, and if we should use her RRSP or mine or my TFSA and how much and when, etc.
Working on this video now. Should have something out early June
Could you do a video about retirement plans for the average retiree?
By average I don’t mean the “average” 73K Canadian income.
I see videos about retirement and I see plans that aim at 5k or 6k income a month for retirees. A lot of people don’t make even close to that when they are working and don’t have even close to 500k saved up when they retired.
So these videos are so misleading.
Thanks. Excelent videos good job.
Thank for the video. Just wondering (because our financial advisor did the same thing) why did you take out less money when Mr and Mrs Utube started CPP?
To offset the CPP taxable income and keep your average tax rate fairly level
CPP and OAS are always taxable income. The money you take out of the RRSP or RRIF is also taxable income. If you delay CPP and or OAS and only take out RRSP or RRIF then you will pay tax only on the RRSP/RRIF. So when the time inevitably comes that you have to take the CPP and OAS at say 70, and you still are drawing down the RRSP/RRIF, so as to not have as much of taxable income from RRSP/RRIF + CPP and OAS, reduce the amount you were taking out of the RRSP/RRIF . You added additional taxable income when CPP and OAS started, so offset the additional taxable income from CPP and OAS by reducing the take out amount from the RRSP/RRIF. 👍
Thanks for the video. The only thing I don't see here is the opportunity cost of the RIF $ that are taxed. If I withdraw $30K from my RIF and pay $3K in taxes, I've lost the opportunity to grow that $3K. If I don't need the money, I can only redeposit $6-7K in TFSA and the balance can be invested, but returns taxable. How do you calculate for this?
It's opportunity cost versus deferring a growing tax bill. Majority of time leveling the tax will win. Just run the numbers for your situation to confirm.
Adam, but if a retired couple has or creates a large tax-deductible mortgage expense by purchasing real estate, would not the mortgage expense allow for a withdrawal of RSP with an offset or reduction of tax payment?
You forgot about the rental income...
Hi Adam can we do rrsp income splitting if both of us over 65 years of age- thanks
As Ling as it's converted to a RRIF, then yes you can
I would like to see these numbers ran, but with a 55 or 56 year old instead of 66
Ya, even more savings!
TFSA does not participate in long term care calculation where an RSP does.
Correct, which is more of a reason to melt it down!
@@ParallelWealth You just shove everything into something that produces no income. That way if your RRSP is small eno9ugh you won't bust on yur OAS.
Where do you get your actual taxe rate? Is there any assumptions in term of tax credits or you just map the taxable income to a table and if so where did you get it?
Yes, some of us are in the 40+% tax rate at the moment! Good point JF👍🇨🇦
Average tax rate just taxes paid divided by income. Marginal tax rate comes from a table or another scenario where and incremental income amount is applied and you calc the additional tax incurred. Average tax rate is always lower because the first $income incurs no tax due to the basic personal deduction amounts
@@DK-hu3jj Wow! You are not kidding saying that Average tax rate is lower than than the marginal tax rate! I just did the two calculations....ATR was 12% and as I stated earlier I sit in the MTR of over 40%....that is quite a significant different...huge delta!
The plan here takes into account tax credits and deductions.
There are probably many older retires (myself included) that wish they knew about this strategy. I find myself now trying to get my RRSP down to under 100K, and always fighting with the OAS rollback number. Adam might want to do a video about this and how it can be more difficult if a spouse passes early.
Really good suggestion...I look forward to seeing how his program works on your situation👍 🇨🇦
Find a spouse
@@mrbbqlvr4274 LOL....your a funny person☺
In this Plan you provide do you account for where the money comes from to Pay all these taxes?
Yes, that's a large part of the discussion with clients. We just recently did a video on cashflow in retirement and the importance of planning
What software are you using?
Snap Projections. Industry use only unfortunately.
Great info
Adam! Unfortunately we are late to the game of knowledge. Is there any freeware that will let us do projections with different amounts of rrsp withdrawals for a husband and wife ? Wealthsimple ?@@ParallelWealth
We are fortunate to have a large RRSP and a DB pension plan--what is a marginal rate that we should target-easy to withdraw from RRSP when the cash is surplus to our needs but become a tax payable-we will end up depositing to TFSA to max and then excess to non-registered investments
Focus on average tax rate, not marginal.
@@ParallelWealth Would like you to talk more about this average vs marginal in a few new vids please. ☺ 🇨🇦
Really good point to raise. I agree. I have a large RRSP and DB pension plan and a very large non registered investment account.
I will definitely defer the OAS and CPP, without a doubt. Then draw down the RRSP but have to stop all the dividends in the RRSP.
Like you said, what is taken out of RRSP is tax payable, then put that into the TFSA-another investment account with dividends being generated, with excess into nonRRSP investment account which increases the dividends being produced because that money will be used to buy more stocks or top up the ones I already have. LOL.....it is weird to think that it appears having dividends being produced each month in all 3 accounts, rrsp, tfsa and nonrrsp, is like the gift that keeps on giving.......Too Much!!! What😳🙃⁉What I am doing is practicing to lower my taxes by donating as much as I can to charities. I am still in the go go phase so I still need to save for an interesting passion I have of an energy efficient extension. I do not want to reduce the savings totally because building right now is very expensive. All very interesting of a topic..managing ones money! Appreciate your comment D&K.👍
I think the math on average tax rate is to run scenarios of pulling as much out of RRSP as possible and put into non-reg account. In doing so the optimum amount is the lowest total tax bill, summing the taxes for each year plus tax on death of last survivor. Should as well do NVPOf course the math problem
-should as well do NPV calc of taxes because PV of taxes at death some 20 yrs from now is less than same amount of taxes today on income-overall I think we need to plan or high and low scenarios since we cant solve the equation unless we know date of death.
One question... when you convert your RRSP to a RRIF (say at 65), when you withdraw the minimum amount each year, is part of the RRIF withdrawal tax free?
It's all taxable income. Unless you're only making 11k/year or something
Once 65, the first 2k can be used for the pension income tax credit - which makes it tax free
Don't forgot about that pension income tax credit of $2000. So if you withdraw a minimum amount of 5000 out of your RRSP or RRIF, the first $2000 is tax free and only the $3000 would be added to the taxable income instead of the full $5000. Cool!👍😊
@KP14 There is often confusion between “no withholding tax” and “not paying income tax”. When you withdraw the minimum there is no withholding tax, but that income is taxable and accounted for when you file your taxes. Minimum RRIF withdrawals are not tax free.
I like your videos but there are sometimes, what seem to me, logical gaps or wrong focus.
How much tax you pay is irrelevant if it doesn’t effect your after tax income. If I pay twice as much tax but have 10% higher income then this is a good option, regardless of tax. In your two examples, the after tax spending is equal, so tax savings are irrelevant, especially since the end balances at 87 approximately equate.
The added flexibility of TFSA vs RRSP, i completely buy, but the video makes it seem like there is a much larger benefit than just this.
Correct Marc, as mentioned many times throughout our videos, #1 focus in a plan ia more after tax income...of you can then also pay less tax and create a better estate situation - those are #2 and #3. Hope that makes sense.
I’m not quite convinced the RRSP meltdown will result in the lowest overall taxes paid. Isn’t it better to keep the annual taxable income and therefore the average effective tax rate constant over the years instead?
The meltdown is what keeps the average tax rate level until life expectancy.
You'd be surprised HOW MUCH the government wants you to withdraw from RRIF, something like 25% at 90. At low 70s 5% easy... But you can't avoid the tax man for too long!
I'll leave my incorrect comment up, but the actual RRIF withdrawals are
80 - 6.82%
85 - 8.51%
90 - 11.92%
95 and older - 20%, according to a CIBC Wood Gundy Google link. It really ramps up over 90!
@@jimwu8532 It shouldn’t matter much as by age 90, your RRIF should be completely depleted by then.
In the real world no money grows it just goes down the drain. It's all wishful thinking on the part of the said people or persons who get swelled heads and lose most of their money. The old adage "most people die broke" is still true.
Good thing you arent a financial planner.
🤣🤣
I wish you will also cater to people without $500K+ like this couple, especially the single parents and those who simply do not have that kind of money for retirement!