RRSP MeltdownAn RRSP Meltdown is a structured and systematic withdrawal of your cash from an RRSP (Registered Retirement Savings Plan) account, with two goals in mind, one, keep tax to a minimum, two, deplete the RRSP account of cash by the time you turn 71. So why would someone do this? At age 71 your RRSP account must be converted to a RRIF (Registered Retirement Income Fund) or converted to an annuity or cashed in and all monies withdrawn, while paying all the tax owing. Along with the RRSP money you are also entitled to 3 major government benefits: CPP -- Canada Pension Plan(if you worked during your life an paid into CPP you will receive it)OAS -- Old Age Security(every Canadian who meets residency requires receives it)GIS-- Guaranteed Income supplement(every Canadian who receives little or no CPP receives GIS--if they apply for it) These government benefits are:
This creates a triple hit:
The combined loss to taxation, claw-backs, and inflation can equal about a 75% MTR. (Marginal Tax Rate). Who can afford that? Let’s look at how loss of your indexed government benefits can impact your retirement income. An example of How an RRSP--can reduce your retirement incomeSuppose you are in a 31.15% marginal tax bracket at age 21 and you fund an RRSP at $200 per month and you did that until age 65, and you didn’t access the RRSP account until required at age 71 --(Assume a 7% rate of return) Your account would be worth $975,669.43). Under current RRIF rules you would have convert your RRSP to a RRIF and your minimum withdrawal would be $74,004.40. Along with your C.P.P. (Canada Pension Plan) and O.A.S.(Old Age Security) your income would put you in a 43.41%. This means you would pay 43.41 cents in tax for every dollar you withdraw.(an increase in your taxes of 28%) At the same time the government will look at your total income and claw-back most if not all of your of your OAS. Many people would also argue so what? The retirement income is large enough to fund the retiree’s income, pay the taxes and accept the claw-backs and inflation loss. So big deal. The big deal is the whole situation can be avoided by doing an RRSP meltdown.
Lets talk about the tax--withdrawing from an RRSP causes tax to be paid. It is important to remember the tax on an RRSP account will be paid whether you withdraw the cash tomorrow or 50 years from now -- it will be taxed! A good financial plan will calculate the best time to withdraw to funds to:
This issue is onerous enough that more and more Tax professionals are bringing it up to their clients and advising a tax avoidance strategy, like a RRSP Meltdown, be implemented. because not dealing with it can inadvertently, but significantly reduce retirement income. The next issue is what happens to the withdrawn cash? It is used in an alternative strategy. Either “Insured Retirement” or “leverage”or a combination of both. Hiring a professional to explain these options will afford you the opportunity to eliminate much of the future taxation, plus make sure the claw-backs and inflation loses that would normally windup devastating your retirement funding don’t happen. Think of your retirement funding as a “PIE” -- the government can either add a slice to your PIE or they can take a slice away that depends, strictly, on how you make your PIE. If you want that extra slice from the government to add to your PIE. Contact
Terry Johnston Today
. He can get that slice for you.
Return from RRSP meltdown to RRSPS
Terry Johnston CFPJ C Mitchell Financial Services Inc. Phone: 866-721-7781 ext. 232
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