3 RRSP Meltdown Strategies to Save MASSIVE Taxes

a lot of Canadians roll up and into retirement without a serious strategy on how to get money out of their rrsp or their riff and with just a little bit of forethought and a game plan you can save yourself a stack of taxes my name is Reese I'm a chartered investment manager a fellow of the Canadian Securities Institute and a financial planner and today we're going to be dissecting what is often referred to as the rrsp Meltdown which is really just a cute catch-all name for a number of different ways that you can get your money out of your rrsp or your riff or a number of different kinds of registered plans as quick as possible with as little tax as possible and the reason that this is such an appealing idea is twofold one we pay a stunning amount of tax in Canada so anytime that we have an opportunity to legitimately reduce it we should probably at least take a look at it two if you die with an rrsp and do not have a spouse or an eligible dependent to roll it over to then it's all taxable in one hit and can lead to the loss of a massive amount of it in taxes and pretty much no one likes that so what I'm going to do is walk you through three of the most common ways to melt down an RS p and I'm going to show you how we approach it for our clients and I'm going to do this step by step so that you will be a Jedi at the stuff by the end of this video however if you're already a Jedi then we've taken the time to break this video up into chapters so you can feel free to just skip around to whatever section floats you both but for everyone else there's some very important groundwork that we need to go over before we can really dive into this you need to know one very important thing about how we are taxed in this country because pretty much all of the strategies hinge on it but don't worry I will make it very easy and very clear we have what is called a progressive tax system and it's called that because we are taxed progressively more aggressively the more we make and not just by the federal government but also by your provincial government now each province has their own tax rates and some are nastier than others but let's just use Alberta for an example and to keep this simple I'm just going to use the combined Federal and Alberta tax rates all in one and for the rest of this video so here you can see that in 2023 the first fifteen thousand dollars you make is taxed at zero percent so you pay no tax on anything you make up to 15 grand in the year the next chunk of money you make from 15K to 21k is taxed at 15 so you pay 15 on that chunk but it is extremely important to understand this and many people get it wrong but you do not pay 15 tax on all of the income that you make now that you've bumped up into that next tax bracket you only pay 15 on this 15 to 21k chunk the first 15K is still tax free now the next chunk 21k to 53k is taxed at 25 but again you are not paying 25 on all of your income just this portion this chunk is still taxed at 15 percent and this chunk is still tax free so most of us never really have one tax rate we usually have a bunch of tax rates and they get higher the more we make but never forget that first 15K is still tax free again each province is a bit different so I'll post a link below to a list of tax rates by province if you want to check out the combined rates in your Province and I recommend you do that but the key Point here is and this is critical whenever you pull money out of an rrsp it is treated as income and so you have to pay tax on it in the year that you pull it out and so if you have other income in that year then whatever you pull out of your rrsp just gets tacked up on top of it and catch this it gets taxed then at whatever your top tax brackets end up being so if you're in Alberta and you make fifty thousand dollars in a year your top tax bracket would be 25 and if you pull 10 grand out of your rrsp then you would be adding ten thousand dollars to your fifty thousand dollars of income so as far as the government sees it you've actually made sixty thousand dollars for the year and we can see here that some of that ten grand three thousand and change would still be taxed at twenty five percent but the rest would slide right up into the next tax bracket and be taxed at thirty point five percent which is quite a bit more not cool so this is why it's so important to understand how this works because once you do then it can really help you tweak your withdrawal amounts to find that Goldilocks number and as I mentioned before even though these strategies are often referred to as rrsp meltdowns they can apply to a bunch of different registered plants especially riffs and a riff is simply what an rrsp account turns into when you're done putting money into it and are ready to start taking money out of it on a regular basis now obviously there are some nuances between the two account ounce but this video isn't about that what matters is that they are both taxed as income when you pull money out of them anyway now that you understand all this let's knock out the most obvious strategy first and I say obvious but many people miss this and I know that because I see it constantly strategy number one milking low or no income years basically if you have a year when you have no income for whatever reason then pull fifteen thousand dollars out of your rrsp because you'll get it all tax free that's right because as of 2023 in every province in Canada except Nova Scotia you pay no tax on the first 15 grand you make so this is a serious no-brainer and you may even want to pull out a little bit more because even though the next chunk is taxed it's usually taxed at a pretty low rate in Alberta the next six thousand dollars would only be taxed at 15 so you may want to take advantage of that low rate while you can and yes it is true when you pull money out from an rrsp you do have to pay what's called withholding tax right off of the top that's the government's way of making sure that you don't end up owing them a bunch of money at the end of the year because remember all withdrawals from an rrsp are taxable so this withholding tax is automatic There's No Way Around It Whatever financial institution it is that you deal with just takes it right off of the top and gives it right to CRA but after you file your taxes the government would see that you're actually in that zero percent tax bracket on the first 15 grand that you make and so therefore they would end up owing you all of that tax back so in the end you end up with all your money smart and the strategy actually works really great for low income years as well let's just say you made 10 grand in the year well you still have another five grand that you could make without having to pay any tax on it so just pull that five grand from your rrsp tax free easy peasy strategy number two the loan Shuffle okay this strategy is definitely not for everyone in fact as of right now I have zero clients doing it zero and as a matter of course I never recommend it but that doesn't mean that it's not valid and that it doesn't work because it is and it can so that's why it's included here because even though I may not recommend it people do do it but the vast majority of people who are entering retirement are actually looking to decrease risk stress and debt not increase them and this strategy involves taking out a new loan usually a big fat one and purchasing a brand new Investment Portfolio with it now the reason that you would do this is because the interest you pay on loans that are used to purchase non-registered Investments that can generate income can be tax deductible so in effect you can offset any rrsp withdrawals that would be taxable with any interest that you pay on the investment loan that would be tax deductible basically they can be Awash and if you structure it a certain way then you don't even really need to come up with any extra money to do this because you can simply use the money that you withdraw from your rrsps to make the payments on your investment loan now you might say well that's stupid sure maybe I avoided the tax on my rrsp but I just ended up spending my rrsp withdrawal on paying the interest on a loan so why would I ever bother doing that well the reason is that your Investment Portfolio should be growing over time and actually have has the potential to grow more than what you're paying in interest especially once you factor in compounding growth which is growth on top of your previous growth again this can work but it's full of risk among other things it's assuming that the markets are going to play along with you and sure over the long run they definitely have a track record of doing that but every once in a while they do happen to throw a particularly nasty fit and there's no saying that they won't wait until the day after you take out a giant investment loan to do it classic and don't forget this is someone else's money you can't just walk away from this if the markets are down and you're sick and tired of it you're on the hook this is your liability now now there's a lot more that can be said here but I don't want to beat this with the stick because I'm not actually encouraging anyone to do this yes it can work people borrow to invest all of the time what do you think you did when you got a mortgage to buy your home you did exactly that and over the long run it's probably worked dealt really well for you but the key difference is you get to sleep in that home you can't sleep in an Investment Portfolio unless you're Scrooge McDuck he's even got a pool full of coins swims in it ain't my style but then again I'm not a duck so what do I know strategy number three shoving off other income this is the most common way to melt down an rrsp and that's because pretty much everyone can do it and the risks are really low basically the classic line of thinking when it comes to retirement income has been to take your CPP and your old age security as soon as you retire and then hold off taking your rrsps for as long as possible or at least taking out as little as possible every year the reason for this line of thinking is that as long as money is in an rrsp or a riff you don't have to pay tax on any of the growth so you want to leave all this money growing and compounding tax deferred for as long as possible so that your account can get as large as possible and frankly sometimes this strategy works out just fine especially if you live a long life but if you have a really large rrsp or if you die earlier than expected when you die the full value of your account is treated as income on your final tax return unless you have a spouse or another eligible dependent that you can roll it over to and as we saw earlier when we were going over how tax brackets work the more you have in there the more you will be taxed on it remember you will be taxed progressively more aggressively the bigger it is in fact if you have other income on that final tax return it's not that hard to end up in a position where you could end up losing half of the value of your account to taxes and that is Hardcore so the main idea behind this strategy is to actually do the opposite and to start draining money out of your rrsp or riff in the early years of your retirement so that you can get the money out of those fully taxable accounts and into no tax or low tax types of accounts like tax-free savings accounts or non-registered accounts of course you got to be smart about this though because remember whatever you pull out of your rrsp or rif is added to your income for the year and taxed at whatever your top tax rate is so you're going to want to find that top tax bracket that you want to stay under and make sure you cap your income at that level so looking back at those Alberta rates for example we can see that any income over 53 000 in change bumps you from a 25 top tax bracket to 30.5 percent so maybe you want to keep your total taxable income below 53 000 just to keep from paying that extra 5.05 percent that you don't have to of course if you have to or if you want to then go for it but the moral of this story is that you don't want to go Hog Wild and just pull it all out in one ear because unless it's a tiny account you'll simply lose too much of its attacks but what you want to do is pay attention to the tax rates because once you know them then you can usually just manipulate how much you pull out of your rrsp or Riff to get your income right where you want it and find The Sweet Spot the next step is deciding which other sources of retirement income you have that you can delay taking so that you can focus on taking as much of that retirement income as possible from your rrsp or rif in order to melt them down the main other sources of retirement income that most people have in common are CPP and OAS and as you may know you have the ability to delay taking those all the way until age 70. and if you do choose to do that you will get an increased amount for both of those benefits for the rest of your life to make up for the fact that you delayed taking them for instance old age security benefits normally start at age 65 but for every month you delay them you get a point six percent increase for the rest of your life so if you hold off until age 70 that's an increase of 36 percent to put some skin on that for you if your OAS benefit was going to be 700 a month at 65 but you held off until age 70 then your benefit would increase to 952 dollars a month and that doesn't even include the automatic inflation increases that are built right in so it would actually be more and normal age for Canada pension plan is age 65. but you can actually take it as early as age 60 if you like but you get a decrease of 0.6 percent for every month you take it early so if you take it as soon as possible at age 60 then you end up losing 36 percent for the rest of your life and sometimes that does make sense to do but it is a pretty big hit on the other hand if you delay CPP you get an increase of 0.7 percent for every month you hold off and that adds up to an increase of 42 percent at age 70 which is massive so again to put some skin on this if your CPP benefit was set to be one thousand one hundred dollars a month at the age of 65 then holding off to age 70 would Beef It Up to 1562 a month for the rest of your life plus inflation adjustments so that's why holding off on one or both of these pensions is such a common way to facilitate an rrsp meltdown because not only does it allow you to drain out your RSP your rif accounts early on but it also rewards you with permanently increased guaranteed inflation-protected pension income for the rest of your life this can work out really well and it can save you a ton of taxes in the long run because it eliminates the potential of that big tax bubble that you would get if you were to die with a large rrsp but it has its downsides too this strategy for sure means that you are going to be spending way more of your money earlier on and will mean that you will be relying far more on government-sponsored pension plans in your latter years some people are comfortable with that some people are not some people would way rather have a potential tax hit on their final tax return when they're already dead anyway then drain down their own Investments early on and I get that taxes are not the only thing that matter not at all lastly one of the common misconceptions with this strategy is that a lot of people assume that because you're pulling all of this money out of the rrsp that you automatically get to spend it all but that's not true you don't have to do that at all in our earlier example we chose to pull out enough rsps to get our income to 53k for the year but we did that for tax bracket purposes we wanted to max out how much we could take out at that 25 percent rate but maybe we only need 40K to live on for the year so we take that extra 13k and and we reinvest it into a low tax or a no tax account easy peasy I have clients that do this all the time and of course we should always do that we should always save or invest whatever we don't need to use so that our money can go to work and make more money for us which leads us to the last segment of this video How We Do It basically I'm agnostic when it comes to rrsp meltdowns sometimes they make a lot of sense and sometimes they don't but what it really comes down to is what your priorities are everything else is secondary what we're really looking for is not just the most tax efficient path but the most palatable path the path that you find most attractive once you've seen and understand what all of your best options are and that'll always include tax efficiency but not to the exclusion of everything else you may not be comfortable spending the bulk of your own assets early in retirement and you may not be comfortable being more dependent on the government programs in your latter years so we have to finesse the plan to get it exactly where you like it here's a quick and simple example of what I mean meet Bob schlob yep that's right Bob schlop he has an excellent Name he's single he's 59 and he plans to retire at 65. he owns his home and has a good size rrsp and tfsa now I'm not going to drown you in all the background assumptions and details because I want to keep this short and to the point as it stands Bob isn't exactly sure what the best path forward is he was kind of thinking of just going with the good old-fashioned approach and taking his CPP and his OAS as soon as he retires hold off on taking money out of his RSP for as long as possible so they can grow tax deferred and just top off his income from his tfsa in the meantime and here it is in color you can see the first six years of Bob's retirement are made up of CPP OAS and tfsa withdrawals and we can see that it's not too bad if he does this he's tracking Awards meeting 98 of his retirement income goal so that could work there's no buffer in there but it could work now let's just make one tweak and see what the AI in our software tells us is the best way to pull out from the rrsp and tfsa given the scenario we're just going to let the software do all the math and calculate all the tax implications of all the possible options and then let it map out how we can get the most bang for buck here and here we are this is interesting what we see here is that it's actually better for Bob if he takes a blend of income from his rrsp and his tfsa the whole way through his retirement it bumps him from tracking at 98 of his goal to tracking at 102 percent and it actually added another fifty nine thousand dollars to his estate in the end and if we look at what his estate will be made up of we can see that by age 90 almost all of it will be the value of his home and he will have entirely drained out his tfsa and be left with 70k in his rrsp yes that 70k will be taxable because it's still in his rrsp but remember all the income levels that our tax brackets are based on keep moving up with inflation so in 31 years that 70k would be a lot more like 35k in today's dollars so yes there would be some taxes payable but not enough to lose any sleepover and yes if Bob were to pass away earlier in this scenario then he for sure would have more in his rrsp and therefore would have a bigger tax liability so let's just see what it looks like if we draw down his rrsps first instead of the blend look at that we end up in the same spot we started at we're backed out at tracking at 98 of his retirement income goal true there is no more tax liability at death we did get rid of that problem but now he has less income along the way if he were to live a longer life so really it's up to Bob to choose what he wants more does he want no tax at death or does he want to shoot for more income during his life it's up to Bob but let's try this with one more tweak let's try out strategy number three Full Tilt and see what it looks like if we delay taking CPP and OAS as well and put our rrsp withdrawals on steroids in those early years let's start with delaying CPP first if we push that off until age 70 Bob's CPP benefit will be increased by 42 percent for the rest of his life and look what it did it took him from 98 on track to 101 on track and what if we delay OAS until 70 as well that'll increase his OAS benefit by 36 percent for the rest of his life and look it did give him a bump but not that much he went from 101 to 102 percent it's better than before but is Bob comfortable doing this again up to Bob lastly let's just take a quick peek and see what the software says is the best way to withdraw from his RSP and tfsa accounts if he does choose to delay his pensions there we have it he is now tracking at 106 of his goal the math is saying that Bob can certainly take the bulk of his income from his RSP or riff in those early years but taking a bit from his tfsa every year will help keep him in that sweet spot tax wise lead to more net income throughout his retirement and leave a bigger estate the point is everyone's situation is totally different which is why I don't have a strong bias as to how to build out a game plan or as to how hard and fast we should draw down in rrsp we try it all and we see what fits and then we get her done so there you have it now you know your way around the rrsp Meltdown

Channel: Well Built Wealth

Views: 428,209

Keywords: Reece, reese, martel, well built wealth, retirement, retire, planning, tax, taxes, canada, canadian, investments, invest, investment, how to avoid tax, how to reduce tax, financial, finance, personal finance, financial education, retirement planning, early retirement, financial independence, investing, income, wellbuilt wealth, well-built wealth, retiring, canda, meltdown, rrsp, rrsp meltdown, withdraw, withdrawal, save tax

Id: cCIcDLAx9YI

Length: 23min 12sec (1392 seconds)

Published: Sat Jun 24 2023