RRSP Withdrawals Explained | Maximize The Use Out Of Your RRSP

hi my name's adam welcome to the channel thanks for joining us today today we're going to talk about uh withdrawing from your rrsp so we're going to talk about kind of two parts of it withdrawn from your rrsp before retirement and then after retirement we're also going to do a five video series in a couple weeks from now that dive deeper into this so this is kind of it will give you the surface concepts of everything in a couple weeks we're gonna do a full series on this that will dive a bit deeper into each individual topic if you haven't already subscribed to the channel please hit the subscribe button join our community we release two brand new videos every single week and make sure the notification bell so when we release our five series video that you'll get notification of those releases so i'm gonna jump into withdrawing money from your rrsp before you retire so there's two main reasons that we see people withdraw money from their rrsp and that's for the homebuyer plan and the lifelong learning plan so those are two ways to get money out of your rrsp you don't pay tax when you pay pull the money out for those two home buyer plan and lifelong learning plan you get money out of them and again we'll do a video on both of these down the road that go into full detail but you can pull money out of for a home buyer planner lifelong learning plan there's no tax due when you pull it out you just have a set timeline 10 to 15 years to pay that money back or else it will be taxable down the road so if you haven't owned a house for the last four years your spouse or common law partner or you're looking to go back and get further education those are two great resources to use your rrsp to help fund those either home purchase or education the third time we look to pull money out of an rrsp before you retire would be if you're in a low tax bracket so this could be either maybe you had a baby and you're at home on mat leave or paternity leave and your income has dropped a lot for the 12 month period depending on when you had your baby if you had it later in the year maybe you look to do money you take money out of your rsp the following year so you always got to watch your taxable income for that calendar year but if it makes sense on a planning perspective to take money out of your rrsp because you have a low income for that year because you had a baby you're at home you have no income or very little income look to pull out rsp money in a very low to little tax bracket so that's one strategy to use the other one and we ran into this this past week with a client a new client of ours is you know this the wife retired a few years earlier the husband's still working has a large income all she has for income is cpp so what we're going to do is take some money out of her rrsp again she's going to be in a very low to little tax bracket um so the income that she pulls out of the rrsp will pay essentially zero tax on it's going to be about an eight percent tax rate on that so very cheap way to get money out of the rsp now and put it into her tax-free savings account and allow them to build up their assets on a tax-free basis versus compounding that in the rrsp so that would be the other way so you know again either you have just a year of low income maybe you got laid off or you had a baby or whatever it is so if you have a year of low income pull money out of an rrsp potentially or if you retire early and maybe your pension hasn't kicked in or cpp or oas or other look to pull out rrsp as well so those are you know a few strategies that you can use to get money out of your rrsp with you know a low tax due so generally rrsps are made to build up over time you get a tax break when you put money in and when you pull the money out it's going to be taxable so the idea is to pull that money out as an income stream over many years when you retire so rrsps aren't really built to take a huge lump sum out because the whole amount is added to your income which could be quite punitive when it comes to taxes due so if you had a half a million dollars in your retirement plan in your rrsp and you retire it's not like you're going to pull the whole 500 000 out you're gonna you know probably pull out 10 15 20 maybe up to 50 every single year in retirement depending on what kind of plan you have so when it comes time to retire you're going to convert your rrsp to a ref a retirement income fund and that's basically a way to start drawing money out so you have to convert your rrsp to a riff by the age of 71. you don't have to take any money out in 71 you have to take it out the following year when you turn 72 but by the year you turn 71 you have to convert your rrsp to rif which means that you generate you're starting to generate cash flow out of that account moving forward you can convert your rsp to a riff much before 71 anytime after 55 you can convert it to a riff why would you do that so let me explain if you convert your rrsp to a riff it's now retirement income so if you're 65 and you're going to start drawing money out and you want to income split that's the way to do it because you can income split retirement income if you pull money out of an rrsp you're not able to split that income with your spouse if you convert your rrsp to a riff and you pull that money out that money can actually be split with your spouse income splitting in retirement the other thing is once you're 65 you qualify for pension income tax credit okay so that's any income that you generate from retirement income stream you get two thousand dollars can be applied for a tax credit so pulling it out of a riff you can use that tax credit out of an rrsp you can't so be aware of that as well if you pulled four thousand out of your riff technically two thousand that could be split with your spouse and they could use the income tax credit as well so some planning strategies there and reasons why you may convert to a rif before 71. one little tip and advice that we do for a lot of our clients is you don't have to convert your whole rrsp to a riff okay so if you had 500 000 in your rrsp you could move a hundred thousand of it to your rift because once you move money to a riff there's a minimum amount that you have to take out every single year based on your age or your spouse's age if they're younger so be aware of that if you convert the whole thing you might be forced to start taking out more than you want to so you know maybe you want to move over just a part of your rrsp tourist to allow a lower required amount of income but get some of those tax benefits that i mentioned earlier so with an rrsp if you redeem money out of an rrsp you're going to pay withholding tax so there's kind of three levels of withholding tax anything up to five thousand dollars that you pull out of an rrsp it's a ten percent withholding tax from five thousand to fifteen thousand is twenty percent and anything above fifteen thousand there's a thirty percent withholding tax and all that means is cra is just holding back some taxes that you're gonna eventually have to pay now this isn't the amount of tax you have to pay if you make a hundred thousand dollars and you pull you know ten thousand dollars out of your rrsp they've only withheld 20 tax but you're in a 40 tax bracket so you're going to still owe more tax it's just a withholding tax not the actual amount of tax due so be aware of that once you convert your rrsp to a riff down the road there is a minimum amount that you have to take out of your riff and we'll put that up on the screen right now so you can see depending on your age it's a different amount of money that you have to pull out and that's where i talked about maybe you only want to convert part of your rsp to a rift down the road to you know keep that required withdrawal amount as low as possible now your minimum amount of rift that you have to take out every year there is no withholding tax on anything above the minimum there's going to be withholding tax based on the formula i said below before so under 5000 or less is 10 percent um 5 000 to 15 is 20 anything above 15 000 is 30 so be aware of that the minimum rift amount no withholding tax anything above the minimum there's going to be withholding tax now if you come into an emergency where you need to pull more money out of your rrsp than you want to let's say you have to pull 20 000 out of your rsp uh because you have an emergency whatever it is and you don't want to have 30 withholding tax you could do four five thousand dollar withdrawals and that's going to keep you with holding tax to 10 so if you do 5000 5000 5000 5000 each redemption will have only 10 withholding tax but be aware of your overall tax situation because having less withholding tax all that means most likely for you is that you're going to have more tax due when you do your tax returns so sometimes having a 30 withholding tax is actually beneficial because it just puts you in a better position to not owe a huge tax amount down the road now when we talk about redeeming money from your rrsp when you pull money out of your rrsp that money is taxable to you and only to you you can't split that income now once you've converted it to a riff a retirement income fund that income can actually be split so just be aware of that there are strategies there um you know when you pull money out of a rift to income split much like you can with you know a pension plan so be aware of that there are different tax consequences pulling out of an rrsp or a rif lastly what happens to your rrsp if you haven't pulled everything out and you pass away so if you pass away with an rrsp and you have a spouse or common law partner your rrsp or rif will roll over to them on a tax-free basis so if you have 200 000 in your rift account you pass away that 200 000 will roll to the rift of your spouse or common law partner but what happens if your spouse's common law partner has passed away already or you don't have one so it's quite punitive so when you pass away if you have that same 200 000 riff when you pass away it is added to your income in year of death so if you had 50 000 of income already and you add that 200 000 on to there you're paying about a 50 marginal tax rate on that money so you're gonna lose close to 100 000 to taxes of your 200 000. so when you look at passing money to maybe kids or through your state or whatever beneficiaries you want to be aware of the tax consequences of your rrsp or rif compared to other assets because your 200 000 rif asset is really only probably worth about 100 000 maybe a bit more after the taxes are paid so be aware of that whereas your principal residence you know yes there's probate but there's no tax to be paid on that so you know a million dollar house is really worth close to a million dollars in your estate so if you say well my house is worth let's say 500 and my riff is worth 500 and you leave you know your rift to one kid in your house to another there's a very different valuation once taxes are paid so just be aware of that down the road so you know when you're looking at withdrawing your rrsps and tax consequences and estate planning around that just be aware you know it may make sense to really decumulate your rsp and rif assets earlier on so that you die with little to no rrsp or rif so that can really save a lot of taxes down the road but it needs to be part of your overall plan so just be aware of that make sure everything integrates well into your both retirement income plan and estate plan they have to work together cohesively so hopefully this gave you a bit of a better idea of you know how withdrawing money from an rrsp works on a tax standpoint again a home buyer plan and a lifelong learning plan are ways to get money out of your rrsp without paying any taxes you do have to pay the money back but you can use your rsp to pay for schooling or down payment for a house so if you fall into years you know before retirement where you have little to no income you may want to look at redeeming money out of your rrsp to give yourself a bit of income in a very low tax bracket and de-register some of that rrsp when you get close to retirement make sure to look to convert some or all of your money from an rsp to a riff to take advantage of income splitting and the pension income tax credit so those are two things that you want to look at as you get closer to retirement and remember you don't have to convert all of your rrsp to a riff until you turn 71 so that's important as well maybe partial conversion makes the most sense for you for tax planning retirement income planning and estate tax planning as well and lastly remember if you die with a large rsp or riff the tax consequences if you don't have a spouse or common law partner can be very punitive so make sure you have a great estate plan in place to make sure that the most amount of money passes on to your beneficiaries charities whoever it is that you're passing your money and assets on to so thanks so much for joining us in this video today make sure the thumbs up if you enjoy this content it really does help get it out to more people it helps with the youtube algorithm which sounds crazy but that's just how it works so uh hit the thumbs up button make sure to subscribe and again in a couple weeks we're gonna be doing a full five series video on this topic and diving into each topic with more detail so thanks again for joining us today have a great day

Channel: Parallel Wealth

Views: 101,064

Keywords: Financial Planning, Retirement Planning, Estate Planning, Retirement, Tax Planning, Investing, Real Estate Investing, Stocks, Bonds, Savings, Passive Income, RRSP, TFSA, Wealth, Parallel Wealth

Id: vIKq8Htnytc

Length: 13min 27sec (807 seconds)

Published: Fri Apr 09 2021