Should Peter and Angela continue to take out the minimum from their RRIFs or increase their income?

Should I withdraw more money from my RRIF?

Peter is 75 years of age, and Angela is 72 years of age. They live in British Columbia and have two children, Beth (47) and Stuart (45), and five grandchildren. Their children are self-sufficient and well-established.

Between Canada Pension Plan, Old Age Security (OAS), and the minimum payments from their Registered Retirement Income Funds (RRIFs), they can easily maintain their current lifestyle.

Peter’s RRIF is approximately $600,000, and Angela’s RRIF is approximately $700,000. They are redeeming the statutory RRIF minimum based on Angela’s age (currently 5.28%). You can your RRIF/Life Income Fund payments on the age of the younger spouse.

They own their own home and have no outstanding debt.

Peter generates a gross income of $60,000 and Angela grosses an income of $65,000. This generates a net income tax of approximately $105,000. Their average tax rate at this income level is approximately 17%.

Angela’s life expectancy is approximately 14 years and Peter’s life expectancy is approximately 18 years. Their joint life expectancy is approximately 20 years (the expectation that one member of the couple is still alive).

They maximize their Tax-Free Savings Accounts (TFSAs) out of their annual income.

They have no other savings.

They asked whether they should continue to take out the minimum from their RRIFs or increase their income.

They are redeeming $5,720/month from their RRIFs. If they increased their payments to $7,100, their funds will last until Angela is 95 years old (assuming a 5% rate of return).

OAS “clawback” starts at $90,997. It is important to keep their income below this amount.

BC has a hidden estate tax. As soon as your net income exceeds $252,752, the BC tax rate increases by 5% – a marginal rate of 53.5% starts to apply. This tax affects very few income earners but many estates. In Peter and Angela’s case, if they both died this year, the tax on the RRIF would be close to 50% or $650,000. It makes sense for Peter and Angela to increase their income from the RRIF by at least $1,000. Their average tax rate would increase to 18% from 17% – far less than the 50% you could pay on death. On Peter or Angela’s death, we estimate that their average tax rate will jump to 25% (loss of one of the marginal tax brackets – currently they are splitting their income).

But what to do with the funds?

1. They could give it to their children or grandchildren. Funds would not be taxed in their hands. Their children or grandchildren can enjoy it now rather than later, and Peter and Angela will no longer pay tax on these funds.
2. They could invest the funds into a non-registered open account. Their TFSAs are already fully maximized.
3. They could buy a joint life, second-to-die life insurance policy. They could buy a $200,000 life insurance policy for $520/month. This would take $634 of gross income to generate a net income of $520/month after tax. If they wanted to guarantee the outcome of this strategy, they could transfer $115,000 into a joint life annuity (which will pay as long as either Peter or Angela is alive). This life annuity (personal pension plan) would generate $695/month – a net spendable income of $634 (assuming a tax rate of 25%).  They would be, in essence, exchanging a taxable balance of $115,000 for a tax-free benefit of $200,000 to their estate.

Conclusion

We recommend that Peter and Angela increase the amount they withdraw from their RRIFs. They can withdraw funds over time at a much lower tax rate, which is a better option than accumulating funds in their RRIFs, which comes with a much higher tax cost at death.