Why clients with large RRSPs and RRIFs might benefit from earlier withdrawals

Clients with large RRSP and RRIF balances might consider triggering bigger withdrawals from their plans earlier in retirement, tax experts suggest, rather than limiting themselves to making only the mandated minimum withdrawals from their RRIFs.

Strategic withdrawals from retirement accounts allow clients to smooth out their income levels over retirement, lowering their overall tax liability, and to manage their access to government seniors benefits.

“I come across more people who defer their withdrawals too long, and take too little out of their RRIF, than the other way around,” said Jason Heath, managing director of Objective Financial Partners Inc. in Markham, Ont.

A client in early retirement who elects to draw down from non-registered accounts and TFSAs to fund their lifestyle, while not touching their RRSP, “could go from a very modest tax bracket in their 60s to a very high tax bracket in their 70s if they’re then taking out of a RRIF that has grown 10 or 15 years more,” Heath said.

Jacqueline Power, assistant vice-president, tax and estate planning and distribution with Mackenzie Investments in Toronto, also said there are cases where it makes sense to start to “melt down” the RRSP or RRIF depending on the client’s situation.

“More and more people are passing away with huge RRIF accounts and not understanding that that’s fully taxable as income [on death],” Power said.

Organizations such as the Conference for Advanced Life Underwriting and the Investment Industry Association of Canada have been asking the federal government to consider providing retirees greater flexibility when it comes to their retirement plans, including recommending that the current age of RRSP conversion be raised from 71; that the RRIF minimum payout formula be reduced; or that minimum payouts be eliminated altogether.

In June, the Department of Finance tabled a report on RRIFs to the House of Commons in response to a motion passed by the chamber last year asking the department to study whether the mandatory minimum withdrawal rates continue to meet Canadians’ retirement income needs.

Heath said he believes having some RRIF mandatory minimum withdrawal parameters versus having none is good, as otherwise some retirees may “never spend their savings.” However, he also sees the value in the government taking an opportunity to reconsider the RRIF minimum withdrawal rates and rules.

“You have more and more people who are arguably working into their 70s who are forced to take withdrawals from their [RRIF] accounts, are forced to pay tax on it, when they might not otherwise want to take those withdrawals,” Heath said.

According to the statistics cited in Finance’s RRIF report, the labour force participation for individuals 70 and over grew to 8% in 2022, up from 4.9% in 1978, while labour force participation for individuals between 65 and 69 grew to 28.5%, up from 13.9%.

Power said she finds that clients today are choosing to delay retirement, or to work during their retirement. Clients with high incomes who are concerned about losing access to government programs such as the over-65 age amount and old age security (OAS) may not want to add to their income by drawing down on retirement accounts prematurely.

“A lot of people do not like the OAS clawback and want to do everything in their power to ensure that that is not happening to them,” Power said.

Indeed, according to Finance’s report, the share of RRIF annuitants who make only the minimum withdrawal from their RRIF generally increases with income. Among RRIF annuitants 55 years and older in 2019 (generally, there’s no minimum age at which an RRSP can be converted to a RRIF), half of those with average total income of $15,001 to $50,000 made the minimum withdrawal. Among those in the same age range with average total income of $200,001 and over, 62% made the minimum withdrawal.

The report also showed that the share of RRIF annuitants above the conversion age making only the minimum withdrawal rises with age — 62% of RRIF annuitants between the ages of 72 to 79 made the minimum withdrawal; 71% of those between the ages 80 and 89; and 82% of those 90 and older.

Power said that clients are increasingly concerned about outliving their savings. For example, some clients will elect to add an additional 10 years of life expectancy to their decumulation and “order of asset withdrawal” financial projections.

“We’re finding that this something that more people are interested in — they want to know how long that money is actually going to last,” Power said.