I am a healthy 82-year-old with a portfolio of about $550,000 in a RRIF. The only money I withdraw is the minimum registered retirement income fund (RRIF) yearly amount. I own my house and live fairly frugally on my full Canada Pension Plan (CPP), Old Age Security (OAS) and the minimum RRIF withdrawal amount. But I do like to travel and am wondering if I should be drawing down more from my portfolio. It would appear that taking out more money would involve more income tax. Would it be a good idea to let the Canada Revenue Agency (CRA) keep my OAS and avoid the instalment payments, which sometimes are late if I am away? And should I make provisions for my two children to save taxes for when the inevitable time arrives? Your advice would be very helpful. —
Robert

FP Answers:
Robert, my first thought was “Why worry about the tax?” You’re 82 years old and enjoy travelling. Go travel! Forget the tax and have some fun. How long before you are too old to enjoy yourself?  What are you waiting for?

Then I thought I should model this out for you to see what the simulations tell us. Not having all of your information, I thought I’d simulate a RRIF meltdown to see if leaving more to your children would save you tax.

To do this, I estimated you’re spending about $54,000 a year and paying $9,500 to $10,000 in tax, based on your CPP, OAS, and the minimum RRIF withdrawal. If you continue spending at that rate, indexed at two per cent, with a five per cent investment return you will have to draw more than the RRIF minimum. Guess what the model shows? You run out of money around age 98. Still want to take out extra for travel? You won’t have to worry about tax because naturally spending down your RRIF over your lifetime eliminates most of the tax burden.

If we were doing these simulations together, you may say you’re not concerned about spending down your RRIF because you will sell your home, use tax-free savings accounts (TFSAs), or something similar.

Let’s get back to the RRIF meltdown and assume you have maximized, and are maximizing, your TFSA. The purpose of the meltdown is to draw more money than needed from your RRIF and invest the after-tax difference in an account taxed more favourably in your estate than the RRIF. The thinking is that lifetime tax can be reduced by paying a little more tax today to reduce estate tax, and therefore, passing more wealth to children. In your case I’m drawing an extra $25,000 from your RRIF so your OAS is not affected, and then investing the after-tax amount in a non-registered account. The accompanying table looks at the difference between an 82-year-old drawing only what he needs from his RRIF or drawing an extra $25,000 a year and investing the after-tax difference in a non-registered account.

 

So, did the RRIF meltdown strategy work? It depends on your objective. If the goal was to reduce the amount of tax you paid over your lifetime, it worked. For every year considered, lifetime tax was less with the strategy. It is interesting to note that at age 90 the meltdown saves about $60,000 in tax but the gain to your children is only about half of that, or $30,000.

The results of the strategy are mixed if your objective is to reduce tax and increase your children’s inheritance. There is an advantage if you die before age 94 but if you live beyond, or another 12 years, then you will be leaving less to your children, even after paying less lifetime tax.

So, there you go. If the inevitable is going to happen within 12 years, draw some extra from your RRI; otherwise, don’t. It is the tax-free compounding over time in the RRIF that compensates for additional estate tax if the inevitable is more than 12 years away. Plus, there is some annual tax and final capital gains tax on a growing non-registered account. The meltdown would have been more successful investing the extra in your TFSA or your children’s tax shelters, TFSA, RRSP, any mortgage, and so on.

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Robert, ask your financial planner to simulate your situation so you can both talk through the results, and you’ll see what to do. Also, confirm your will and beneficiary designations are up to date.

Allan Norman, M.Sc., CFP, CIM provides fee-only certified financial planning services and insurance products through Atlantis Financial Inc. and provides investment advisory services through Aligned Capital Partners Inc. (ACPI). ACPI is regulated by the Canadian Investment Regulatory Organization
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Allan can be reached at alnorman@atlantisfinancial.ca