The Canadian Federal government has recently announced changes to the minimum percentages that seniors must withdraw from their registered retirement savings plans (RRSP) or registered retirement income funds (RRIF) when they reach age 71 and beyond.
The Finance Minister made some quip about leaving the burden to the Prime Minister's grand-daughter. As far as I can see, he should have boasted about how easy the tax burden will be in those future years. For this simple reason, anyone who takes out less of their savings today will increase the taxes their estate pays when they die.
Do we know what we are talking about? C'mon prove me wrong.
What this does is to increase the taxation of a successful RRIF in future years, as well as increasing the RRIF itself. So when the RRIF holder dies, the tax burden on the estate is larger not smaller than it would have been. Hence, the government gets more, not less, though the benefit to a retiree today is to reduce immediate taxation.
Remember this: your increased value in a tax free savings account (TFSA) is also tax free. This is not the case in your RRSP or RRIF. There the increased value of the plan is taxable upon withdrawal or deregistration.
My calculations show that it is better for the estate if seniors withdraw at the old rates for RRIFs and pay additional taxes now than to defer the taxes until their death forces the estate to pay. The increased tax exposure on full deregistration always outweighs the tax savings of paying a little tax now and transferring the surplus if any to a TFSA.
Of course there are many factors, including total amount in the RRIF, growth rates, and age at final deregistration.
The independent variables in my model are these, Inflation, Rate of return on RRIF, Age at death - pick any one, the benefits of the new rates are never positive, Tax rate on deregistration, Tax rate on withdrawals, Budget. I assume individuals are receiving both CPP and OAS and I allow for independent income supplements.
The bottom line is this: If you save more when you are old, you will pay more taxes when you die. Look at it - at the old rates, your forced income is higher so you pay more taxes, but your death taxes are also higher. Total tax paid is roughly $514,000 if you both live to age 85. If you use the new rates, total taxes paid is $555,000 and if you use 1% over the old rates, you pay $484,000
Save your money - pay your taxes now. I have tried this with several scenarios. It always works out better for the estate to withdraw more rather than less. To boot, you get a surplus you can invest in your emaciated TFSA.
| Rate of return | 5% | Taxes rate on deregistration | 45% | ||||||||
| Expense Budget | 85000 | Annual increase | 2% | ||||||||
| Income (CPP, OAP, +Misc) | 50000 | Annual Increase | 1.50% | ||||||||
| Assets | |||||||||||
| Registered Retirement Income Fund | 600000 | ||||||||||
| Mandated | Full | Annual | Taxes on | Old rates | Surplus | ||||||
| Balance | Income | Expense | Withdraw | Growth | Close | Income | Taxes | Dereg. | |||
| Age | 600,000 | 50,000 | 85,000 | 35,000 | 29,125 | 594,125 | 85,000 | 12,750 | 270,000 | 0 | |
| 71 | 594,125 | 50,750 | 86,275 | 43,846 | 30,802 | 581,081 | 94,596 | 14,189 | 267,356 | 7.38% | 8,321 |
| 72 | 581,081 | 51,511 | 87,569 | 43,465 | 30,141 | 567,757 | 94,976 | 14,246 | 261,486 | 7.48% | 7,407 |
| 73 | 567,757 | 52,284 | 88,883 | 43,093 | 29,465 | 554,129 | 95,377 | 14,306 | 255,491 | 7.59% | 6,494 |
| 74 | 554,129 | 53,068 | 90,216 | 42,723 | 28,775 | 540,180 | 95,792 | 14,369 | 249,358 | 7.71% | 5,576 |
| 75 | 540,180 | 53,864 | 91,569 | 42,404 | 28,069 | 525,845 | 96,268 | 14,440 | 243,081 | 7.85% | 4,699 |
| 76 | 525,845 | 54,672 | 92,943 | 42,015 | 27,343 | 511,173 | 96,687 | 14,503 | 236,630 | 7.99% | 3,745 |
| 77 | 511,173 | 55,492 | 94,337 | 41,661 | 26,600 | 496,113 | 97,153 | 14,573 | 230,028 | 8.15% | 2,816 |
| 78 | 496,113 | 56,325 | 95,752 | 41,326 | 25,839 | 480,625 | 97,651 | 14,648 | 223,251 | 8.33% | 1,899 |
| 79 | 480,625 | 57,169 | 97,188 | 40,997 | 25,056 | 464,684 | 98,167 | 14,725 | 216,281 | 8.53% | 979 |
| 80 | 464,684 | 58,027 | 98,646 | 40,660 | 24,251 | 448,275 | 98,687 | 14,803 | 209,108 | 8.75% | 41 |
| 81 | 448,275 | 58,897 | 100,126 | 40,300 | 23,421 | 431,396 | 99,197 | 14,880 | 201,724 | 8.99% | 928 |
| 82 | 431,396 | 59,781 | 101,628 | 39,990 | 22,570 | 413,975 | 99,771 | 14,966 | 194,128 | 9.27% | 1,856 |
| 83 | 413,975 | 60,678 | 103,152 | 39,659 | 21,690 | 396,007 | 100,336 | 15,050 | 186,289 | 9.58% | 2,815 |
| 84 | 396,007 | 61,588 | 104,699 | 39,323 | 20,783 | 377,467 | 100,911 | 15,137 | 178,203 | 9.93% | 3,788 |
| 85 | 377,467 | 62,512 | 106,270 | 38,992 | 19,848 | 358,323 | 101,504 | 15,226 | 169,860 | 10.33% | 4,766 |
| 232,811 | |||||||||||
| Total taxes | 402,671 | ||||||||||
| New Rates (?) | |||||||||||
| 600,000 | 50,000 | 85,000 | 35,000 | 29,125 | 594,125 | 85,000 | 12,750 | 270,000 | 0 | ||
| 71 | 594,125 | 50,750 | 86,275 | 31,795 | 30,501 | 592,831 | 82,545 | 12,382 | 267,356 | 5.35% | 3,730 |
| 72 | 592,831 | 51,511 | 87,569 | 32,836 | 30,462 | 590,458 | 84,347 | 12,652 | 266,774 | 5.54% | 3,222 |
| 73 | 590,458 | 52,284 | 88,883 | 33,886 | 30,370 | 586,942 | 86,170 | 12,925 | 265,706 | 5.74% | 2,713 |
| 74 | 586,942 | 53,068 | 90,216 | 34,982 | 30,222 | 582,181 | 88,050 | 13,208 | 264,124 | 5.96% | 2,166 |
| 75 | 582,181 | 53,864 | 91,569 | 36,023 | 30,010 | 576,168 | 89,887 | 13,483 | 261,982 | 6.19% | 1,682 |
| 76 | 576,168 | 54,672 | 92,943 | 37,092 | 29,736 | 568,811 | 91,765 | 13,765 | 259,276 | 6.44% | 1,178 |
| 77 | 568,811 | 55,492 | 94,337 | 38,176 | 29,395 | 560,030 | 93,668 | 14,050 | 255,965 | 6.71% | 668 |
| 78 | 560,030 | 56,325 | 95,752 | 39,259 | 28,983 | 549,754 | 95,584 | 14,338 | 252,013 | 7.01% | 168 |
| 79 | 549,754 | 57,169 | 97,188 | 40,323 | 28,496 | 537,926 | 97,493 | 14,624 | 247,389 | 7.33% | 305 |
| 80 | 537,926 | 58,027 | 98,646 | 41,349 | 27,930 | 524,508 | 99,376 | 14,906 | 242,067 | 7.69% | 730 |
| 81 | 524,508 | 58,897 | 100,126 | 42,404 | 27,286 | 509,389 | 101,302 | 15,195 | 236,029 | 8.08% | 1,176 |
| 82 | 509,389 | 59,781 | 101,628 | 43,410 | 26,555 | 492,533 | 103,191 | 15,479 | 229,225 | 8.52% | 1,564 |
| 83 | 492,533 | 60,678 | 103,152 | 44,378 | 25,736 | 473,892 | 105,055 | 15,758 | 221,640 | 9.01% | 1,903 |
| 84 | 473,892 | 61,588 | 104,699 | 44,214 | 24,800 | 454,477 | 105,802 | 15,870 | 213,251 | 9.33% | 1,103 |
| 85 | 454,477 | 62,512 | 106,270 | 43,903 | 23,821 | 434,396 | 106,414 | 15,962 | 204,515 | 9.66% | 144 |
| 227,347 | |||||||||||
| Total taxes | 431,862 | Higher | |||||||||
| Rates | |||||||||||
| 600,000 | 50,000 | 85,000 | 35,000 | 29,125 | 594,125 | 85,000 | 12,750 | 270,000 | 0 | ||
| 71 | 594,125 | 50,750 | 86,275 | 50,382 | 30,966 | 574,709 | 101,132 | 15,170 | 267,356 | 8.38% | 14,857 |
| 72 | 574,709 | 51,511 | 87,569 | 49,368 | 29,970 | 555,311 | 100,879 | 15,132 | 258,619 | 8.48% | 13,310 |
| 73 | 555,311 | 52,284 | 88,883 | 48,368 | 28,975 | 535,918 | 100,652 | 15,098 | 249,890 | 8.59% | 11,769 |
| 74 | 535,918 | 53,068 | 90,216 | 47,429 | 27,982 | 516,471 | 100,497 | 15,075 | 241,163 | 8.71% | 10,281 |
| 75 | 516,471 | 53,864 | 91,569 | 46,431 | 26,984 | 497,025 | 100,295 | 15,044 | 232,412 | 8.85% | 8,726 |
| 76 | 497,025 | 54,672 | 92,943 | 45,478 | 25,988 | 477,535 | 100,150 | 15,022 | 223,661 | 8.99% | 7,207 |
| 77 | 477,535 | 55,492 | 94,337 | 44,554 | 24,991 | 457,972 | 100,046 | 15,007 | 214,891 | 9.15% | 5,709 |
| 78 | 457,972 | 56,325 | 95,752 | 43,645 | 23,990 | 438,317 | 99,969 | 14,995 | 206,087 | 9.33% | 4,217 |
| 79 | 438,317 | 57,169 | 97,188 | 42,736 | 22,984 | 418,565 | 99,905 | 14,986 | 197,243 | 9.53% | 2,717 |
| 80 | 418,565 | 58,027 | 98,646 | 41,815 | 21,974 | 398,724 | 99,842 | 14,976 | 188,354 | 9.75% | 1,196 |
| 81 | 398,724 | 58,897 | 100,126 | 40,949 | 20,960 | 378,735 | 99,846 | 14,977 | 179,426 | 9.99% | 279 |
| 82 | 378,735 | 59,781 | 101,628 | 40,070 | 19,939 | 358,603 | 99,851 | 14,978 | 170,431 | 10.27% | 1,776 |
| 83 | 358,603 | 60,678 | 103,152 | 39,195 | 18,910 | 338,318 | 99,873 | 14,981 | 161,372 | 10.58% | 3,279 |
| 84 | 338,318 | 61,588 | 104,699 | 38,331 | 17,874 | 317,861 | 99,919 | 14,988 | 152,243 | 10.93% | 4,780 |
| 85 | 317,861 | 62,512 | 106,270 | 36,014 | 16,793 | 298,641 | 98,525 | 14,779 | 143,037 | 11.33% | 7,744 |
| 237,957 | |||||||||||
| Total taxes | 380,995 | ||||||||||
Here are a few summaries comparing the least withdrawal rate to 1+ the old requirement.
Assets Tax Savings
300K, 25,214
600K, 50,868
900K, 77,837
1.2M, 104,807