How to Reduce Your Taxes on RRSP Withdrawals
Allan Madan, CA
Do you have a significant amount of money in your RRSPs and are concerned about the high tax you will have to pay once you liquidate them? Read more to learn a useful strategy to liquidate your RRSPs today without having to pay tax and grow your savings tax efficiently.
Let’s look at an example:
Michael and Janet are both 51 years old. They have $500,000 in RRSP’s, as well as $100,000 in TFSA’s. Their home is worth $750,000 with no mortgage, and their personal tax rate is 50%.
Michael and Janet’s goal is to save for retirement. They have been contributing to their RRSP’s for over 20 years in order to realize that goal. However, they are worried because they know that once they are retired, they will have to pay tax whenever they make a withdrawal from their RRSP’s.
So let’s assume they were to stop contributing to their RRSP’s now. Based on their current age and RRSP savings, their RRSP will grow to $1.4 million by the time they are 72 years old.
At age 72, they are forced to begin withdrawing from their RRSP, causing high personal tax. These withdrawals will average $90,000 over 20 years. The total combined tax that they will pay on their withdrawal is about $1.27 million.
How can they stop this tax?
In order to stop this tax, Michael and Janet can use the following steps.
Michael and Janet transfer their RRSP’s into an RRIF today.
They go to the bank and ask permission to take a loan from their RRSP for $500,000.
The RRSP cashes out its investments and provides Michael and Janet with a cheque for $500,000 dollars.
The $500,000 is registered as a mortgage against their home. They have to pay back the mortgage over 10 years, with monthly payments of $5,000.
Each month, they withdraw $4,000 from their RRIF, in accordance with CRA rules.
They claim an interest deduction for $4,000 each month, because the mortgage payment of $5,000 is mostly interest.
Michael and Janet’s RRIF withdrawal of $4,000, which is taxable, cancels out with the mortgage interest deduction, so they pay no tax.
The $500,000 cheque they received is invested in their TFSA and goes into the stock market. In 10 years, the TFSA grows to 1 million dollars. Meanwhile, their investments in the stock market grow to $1.5 million.
The End Result
In 10 years, Michael and Janet have 1 million dollars in their TFSA, which they can cash out at any time without paying tax. They have also accumulated 1.5 million dollars in the stock market, which they can liquidate over time so that they can enjoy their retirement. The best part about following these steps is that they have unlocked $500,000 from their RRSP, which is completely tax-free. This represents an immediate tax saving of $250,000.
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.
Hi Allan, does this plan work for a family with 100,000 in their RRSP?
Yes, it can still work.
Sounds like a good strategy. If this works and acceptable by CRA, I would be interested. My big question is how could anybody put $500,000 into the TFSA, since its inception there may only be room for about $60’000 – $70’000.
I would love to hear your response.
Hi, the $500,000 figure is too high, and I should have used a lower amount like $50,000 or $60,000 for example. Overtime, the TFSA balance will grow.
I have withdrawn a substantial amount from my RSP and still am still working. Can my common law wife who has no income claim my Rsp withdrawals under her income instead of mine?
The RRSP withdrawals that you made cannot be included in your common-law partner’s income. The RRSP withdrawals that you made must be included in your income.