Reasons to consider early RRSP and RRIF withdrawals
However, as an RRSP account continues to grow, so too does the tax liability on the withdrawals. Those with large RRSPs may be forced to take withdrawals that exceed their cash flow requirements, which can push them into a higher tax bracket. Some retirees may even lose part of their OAS pension due to high income exceeding $79,845 for 2021.
Several provinces have marginal tax rates that exceed 50% for OAS recipients whose income exceeds this threshold. Even at $150,000 of income, a non-OAS recipient would not have a tax rate of 50%.
Withdrawing from RRSPs and RRIFs
As a result, even if you do not need to take money out of your RRSP, withdrawals can be a way to plan your income. Those working part-time might choose to take some RRSP withdrawals. Incorporated business owners may choose to take RRSP withdrawals and draw a low salary, or even no salary depending on their circumstances.
For some retirees, it can make sense to bring their income up to at least up the top of the lowest tax bracket each year. For high net worth retirees, it may be bringing their income up to the top tax bracket annually.
RRSP withdrawals can be taken at any time, and that makes them flexible. Once you convert your RRSP to a RRIF, you must take withdrawals starting the next year and every year thereafter. Those with uncertain income, like sporadic capital gains from non-registered investments, may want to avoid converting their RRSP to a RRIF until age 71 so that they are not forced to take withdrawals and can instead choose to take withdrawals and plan their income towards year-end each year.
RRIF withdrawals at age 65 or later qualify as “eligible pension income”—as does defined benefit pension income, but not RRSP withdrawals. The first $2,000 of eligible pension income qualifies for a federal pension income tax credit of up to $2,000 depending on your province or territory.
Converting even a small portion of a RRSP to a RRIF may allow a retiree to take $2,000 per year of RRIF withdrawals at little to no tax. You do not have to convert your whole RRSP to a RRIF.
Another advantage of RRIF withdrawals, starting at age 65, is that up to 50% can be transferred to your spouse’s tax return using pension income splitting. RRSP withdrawals do not qualify.