Cashing In Before 71? When Early RRSP Withdrawals Make Sense

Hands Holding Retire Plan Matching Jigsaw Pieces

Topic: Tax Planning, Wealth Planning

Dianne C. White CPA, CA, CFP, TEP

March 6, 2019

Image used with permission: iStock/AndreyPopov


Print & Share

Print

Cashing In Before 71? When Early RRSP Withdrawals Make Sense

Contributing money to an RRSP is synonymous with retirement planning in Canada. While you are in savings mode, the “RRSP contribution first” savings strategy works well as long as your marginal tax rate (pre-RRSP deduction) in your contribution years is the same or higher than the marginal tax rate you are expecting or projecting to pay in retirement.

The deadline to convert your RRSP to a RRIF is the end of the year you turn 71 and you make your first withdrawal in the year you turn 72. At that point, you withdraw the minimum amount required so you have a steady stream of “retirement income” for the rest of your days. However, there are circumstances where you could end up saving too much inside an RRSP and it is appropriate to make strategic withdrawals in the years before converting to a RRIF at age 71.

When do early withdrawals from your RRSP make sense?

The reality is that most folks retire before age 71. It is common to have a few years where you don’t have much in the way of taxable income compared to when you were working, so your average tax rate drops noticeably. This is an opportunity to use lower tax brackets to your advantage. Making early, strategic withdrawals from your RRSP makes sense in this situation because it can:

  •  Lower taxes that you pay in the long term
  • Spread out your RRSP/RRIF withdrawals over more years
  • It can provide a source of cash flow before you start collecting other forms of income like pension income or CPP and OAS

Making an early withdrawal from your RRSP doesn’t necessarily mean you need to spend the money. If you don’t need the cashflow, this can also be a way of shifting more savings into a non-registered account or TFSA. Having savings outside of RRSPs and RRIFs can come in handy, and be more tax efficient down the road, if you need to fund a larger, lumpy expense.

This strategy isn’t for everyone. So it is important to understand how different sources of income you receive are being taxed. In particular, be mindful that the 2019 OAS clawback starts if your annual net income is in excess of $77,580. You don’t want to inadvertently claw OAS back if you don’t need the cashflow from an RRSP withdrawal!

What are you giving up if you make early withdrawals?

  • The loss of tax-sheltered compounding of investment income
  • RRSP withdrawals are taxable and subject to specific withholding tax rates, depending on how much you withdraw within the year, as follows:
    • Up to $5,000, the tax withheld is 10%
    • Between $5,000 – $15,000, the tax withheld is 20%
    • Over $15,000, the tax withheld is 30%

Remember tax withheld at source is not necessarily the amount of tax that is actually payable on your income earned. Withholding tax is a prepayment of tax only. Therefore, cashlfow planning around RRSP withdrawals is important, especially if you owe more than the tax withheld at source on the withdrawal. Make sure you have the funds to cover the balance.

The last thing to note is that you can convert your RRSP to a RRIF before age 71. If you do this and only withdraw the minimum amount required, then there is no withholding tax at all. Again, this doesn’t mean that you don’t owe tax, but rather you could use other funds to pay the tax rather than from the RRIF. Be sure you are not likely to return to work or have any other type of significant income like a large capital gain before converting your RRSP to a RRIF before age 71. Once you RRIF you cannot “un-RRIF” and taxable income will be generated each year by the minimum required withdrawal. Keeping your RRSP as an RRSP provides flexibility to manage withdrawals when you having other income sources that are variable.

Waiting until age 71 to access funds saved in an RRSP or making early withdrawals will depend on your own specific financial circumstances. The best way to determine an appropriate course of action is to prepare a retirement plan. At Nexus, we work with our clients to determine the best way to access RRSPs and prepare a retirement plan that maximizes cashlfow and minimizes income tax.

More Like This...

See another CRM2 blog post that may be of interest to you.

CRM2: The Nexus Approach to our CRM2 Reports

Topic:
CRM2
Excerpt:
With changing securities regulations coming into effect, investment firms are now required to provide individual investors with specific additional in

More Like This...

See another Foundations & Endowments blog post that may be of interest to you.

Increasing the Charitable Disbursement Quota – Well Meaning, but Wrong

Topic:
Foundations & Endowments
Excerpt:
Most Canadians have probably been focused on the recent Federal election. So, it wouldn’t be surprising if some missed an important consultation that

More Like This...

See another Human Interest blog post that may be of interest to you.

COVID: An Uneven – and Unequal – Recovery

Topic:
Human Interest
Excerpt:
Canadians have had enough of the lockdown. Here we are 18 months after you first heard of the then mysterious Wuhan flu. Today, but for any curve ball

More Like This...

See another Inside Nexus blog post that may be of interest to you.

The Nexus IT Crowd

Topic:
Inside Nexus
Excerpt:
We are happy to announce Ian Ligertwood as the newest member of our team. As Vice President, Operations & Technology, Ian will be responsible for

More Like This...

See another Investments blog post that may be of interest to you.

The Future of Money: a Digital Currency Primer

Topic:
Investments
Excerpt:
As a bottom-up investment management firm, we spend a lot of time looking at specific companies. But keeping an eye on evolving industry trends can be

More Like This...

See another Pearls of Wisdom blog post that may be of interest to you.

“Work, Work, Work, Work, Work, Work”

Topic:
Pearls of Wisdom
Excerpt:
This has been a busy year. I’ve had lots happening on the home front (a wedding!) and lots going on at the office (too long to list!) Managing work

More Like This...

See another Tax Planning blog post that may be of interest to you.

The Great Transition – A Tax Efficient Withdrawal Strategy

Topic:
Tax Planning
Excerpt:
The change from “saver” to “spender” is what I call the great retirement transition. Figuring out how to draw on your retirement savings to meet your

More Like This...

See another Wealth Planning blog post that may be of interest to you.

Living to 100… Is 100 the New 80?

Topic:
Wealth Planning
Excerpt:
It’s a common saying that there are two certainties in life, death and taxes. While we have a pretty good idea when we get taxed, which feels like all

On a Side Note…

See another CRM2 Nexus Notes Quarterly article that may be of interest to you.

No posts found.

On a Side Note…

See another Foundations & Endowments Nexus Notes Quarterly article that may be of interest to you.

No posts found.

On a Side Note…

See another Human Interest Nexus Notes Quarterly article that may be of interest to you.

COVID: An Uneven – and Unequal – Recovery

Topic:
Human Interest
Excerpt:
Canadians have had enough of the lockdown. Here we are 18 months after you first heard of the then mysterious Wuhan flu. Today, but for any curve ball

On a Side Note…

See another Inside Nexus Nexus Notes Quarterly article that may be of interest to you.

The Nexus IT Crowd

Topic:
Inside Nexus
Excerpt:
We are happy to announce Ian Ligertwood as the newest member of our team. As Vice President, Operations & Technology, Ian will be responsible for

On a Side Note…

See another Investments Nexus Notes Quarterly article that may be of interest to you.

The Future of Money: a Digital Currency Primer

Topic:
Investments
Excerpt:
As a bottom-up investment management firm, we spend a lot of time looking at specific companies. But keeping an eye on evolving industry trends can be

On a Side Note…

See another Pearls of Wisdom Nexus Notes Quarterly article that may be of interest to you.

A Table for None, Please; Working From Home on the Rise

Topic:
Pearls of Wisdom
Excerpt:
Reading is one of the principal occupations in our profession. As we digest a wide range of material, interesting ideas and surprising facts – some

On a Side Note…

See another Tax Planning Nexus Notes Quarterly article that may be of interest to you.

The Great Transition – A Tax Efficient Withdrawal Strategy

Topic:
Tax Planning
Excerpt:
The change from “saver” to “spender” is what I call the great retirement transition. Figuring out how to draw on your retirement savings to meet your

On a Side Note…

See another Wealth Planning Nexus Notes Quarterly article that may be of interest to you.

Living to 100… Is 100 the New 80?

Topic:
Wealth Planning
Excerpt:
It’s a common saying that there are two certainties in life, death and taxes. While we have a pretty good idea when we get taxed, which feels like all