Tuesday, April 28, 2015

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

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