Canadian RRIF changes - Save your money - pay your taxes now

Decreasing the withdrawal requirement for RRIFs for today benefits future governments and future generations.

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

The above model would not apply to someone with no savings. But even with a modest $300,000 in registered savings, although the expense budget must shrink a little, the tax savings are still there if more rather than less is used of the registered plan per year. And with more substantial RRIFs, there is even more reason to get money out of the non-taxed state and register it in a non-taxable account.

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