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I am a widower, turning 71 before the end of the year. I have annual gross income of about $50,000, cash savings of about $500,000 left from the sale of my principal residence and an RRSP of about $1.5 million returning about 8%. I haven’t put anything into my RRSP for about 15 years. I also have a fully paid vacation property valued at $300,000. I am concerned that I will have to collapse some of my very productive investments to cover the government withdrawal rate of 5.28%.
Can I put some of the bank cash into an RRSP now and/or later? I would like to get an annual tax benefit from that deposit, and I’d also want the annual government withdrawals to be paid back to me from that cash (as long as it’s held in a cash position within the RRSP).
As an aside, can I also gift my daughter funds to help her out without her being exposed to any tax from the gift? My health is good but I do think I have enough to take care of myself. I just want to do the best for everything my wife and I worked so hard to save.
Dave, let me summarize your questions.
I’ll deal with those questions first, before I give you insight on your entire situation. Then you need to step back and look beyond the details and get a good grasp of the big picture. Here is a video to visualize the numbers.
To answer your first question, yes, the registered retirement savings plan (RRSP) rules permit you to make a contribution right up until the end of the year you turn 71, but in your case, I don’t think it is a good idea.
You have already paid the tax on the money sitting in the bank. It is tax-free money! Once you add it to your RRSP you will have to pay tax on it again once you withdraw it. I know it will give you a little tax deduction on the contribution, but it is not worth it.
Do you know how much money you’re going to have to draw from your registered retirement income fund (RRIF) next year? A $1,500,000 RRSP with a 5.4% draw equals $81,000. That $81,000 is then added to your $50,000 income, which I am assuming is Old Age Security (OAS), the Canada Pension Plan (CPP) and a pension, for a total of $131,000 taxable income.
I am not sure which province you are in, but it doesn’t matter—you’re starting to pay some serious tax. Plus, at $131,000 all of your OAS will be clawed back. Another reason not to add anymore to your RRSP.
When you are forced to draw money from your RRIF, you can do an in-kind transfer. That means you don’t have to sell the investment—you can transfer it to a tax-free savings account (TFSA) or your non-registered account. Alternatively, you can sell an investment and then repurchase it, but you will be out of the market for a day or more depending on the investment.
By the way, do you have any TFSAs? If not, you should maximize a TFSA with the cash you have in the bank or the coming RRIF withdrawals.
There should be no trouble gifting the money to your daughter. She will not have to pay tax on the gift. She will have to pay tax on the interest earned, but you could make contributions to her RRSP, TFSA or registered education savings plan (RESP). Or she can use the money to pay any of her debts. Alternatively, have some fun and take a trip together or live some other memorable experiences.
Dave, there is no question, you have the details down. I am wondering if it is time to look further down the road.
If you are living on $50,000 a year, you’ve done a good job minimizing tax. But that’s about to change when you turn 72. And the day you die, your estate will face your biggest tax bill.
I’d encourage you to think about what you want and what you want for your daughter. Are there other things you would like to do and experience before you become too old to enjoy yourself?
If you want to transfer your wealth to your daughter, you can do it more tax efficiently if you start now, in a controlled way over time, as seen in this video, rather than leaving it all to the end. Plus, you will get more satisfaction. And imagine what it will do to your daughter’s overall wellbeing.
Finally, with a large RRSP/RRIF, you may have read that it makes sense to purchase a life insurance policy to pay the estate taxes. I modelled this out and in your case you will have a larger estate without the insurance.
Dave, I hope I have answered your questions and given you a few things to think about. You are in good shape. You have options. And I think your wife would feel good about the decisions you have made. It may be time for you to start thinking about those big picture questions.
Allan Norman, M.Sc., CFP, CIM, RWM, is a fee-only certified financial planner with Atlantis Financial Inc. and a fully licensed investment advisor with Aligned Capital Partners Inc. He can be reached at atlantisfinancial.ca or email@example.com. This commentary is provided as a general source of information and is intended for Canadian residents only.