Could an RRSP/RRIF meltdown reduce Liam’s GIS clawback without triggering a big tax bill?

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Buying through us may earn us a commission, which supports our work.Liam,* 67, is retired, single and focused on managing his finances as effectively as possible.THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountHe is considering a registered retirement savings plan (RRSP) and registered retirement income fund (RRIF) meltdown, a tax strategy that involves drawing down his registered retirement savings before required to increase his income and smooth out lifetime tax.He is also looking into a reverse mortgage as a living inheritance for his nieces and nephews or to free up funds to expand his modest lifestyle.Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againLiam lives in Ontario where he owns a home valued between $650,000 and $700,000. His monthly income is about $3,000 from part-time work ($500), Canada Pension Plan (CPP) benefits ($510), Old Age Security 65 ($740), and Guaranteed Income Supplement (GIS) payments ($1,000), and dividends ($250 automatically deposited to a tax-free savings account, or TFSA). His monthly expenses are $2,200. He wants to save $50,000 over the next four years for a new vehicle and pays $850 a month on a $78,000 mortgage.“I could pay off the mortgage, but I prefer leaving that money in my TFSA where it can grow,” he said. He may downsize down the road if the house becomes too much or to boost his investments.Liam’s portfolio includes nearly $240,000 in RRSPs and about $120,000 in a TFSA invested in a mix of growth and conservative bank-managed mutual funds. He has $30,000 in contribution room in his TFSA.While Liam thinks withdrawing the RRIF minimum and tapping into his TFSA as needed should be able to cover his expenses, he wonders if there is a strategy that could create more financial flexibility without affecting government benefits and reduce his lifetime taxes.For example, in 2030, after he has converted his RRSP (which he estimates should be worth about $300,000 at the end of 2029) to a RRIF, does it make sense to start to “meltdown” the account? Specifically, he wonders if, in addition to CPP and OAS, he should apply his marginal tax rate of 19.05 per cent to systematically withdraw between $30,000 to $35,000 a year from his RRIF and contribute any funds he doesn’t immediately need to his TFSA and to pay off any potential tax liability.If so, he wonders when. “Should I wait until later in the year (November or December) to calculate and execute this extra ‘meltdown withdrawal’?” he asked.“Is there a better way to manage cash flow and tax-plan in my 70s and 80s?”What the expert saysLiam’s $360,000 portfolio is $140,000 more than needed to support his lifestyle, which is likely about $36,000 a year after tax for life, according to Ed Rempel, a fee-for-service financial planner, tax accountant and blogger. This takes into account current expenses as well as mortgage costs.“However, the only reason he needs this much is because he will stop working at some point and his future RRSP income will trigger a significant GIS clawback,” said Rempel. “There is an opportunity for Liam to minimize that impact, but it is unconventional and starts with understanding his actual tax situation.”This advertisement has not loaded yet.This advertisement has not loaded yet, but your article continues below.Part of the challenge is there are specific rules for the types of income that are taxable or trigger a GIS clawback and those that don’t.“Liam thinks he is in a low 19 per cent tax bracket, but he is effectively in a 50 per cent tax bracket. He actually pays 0 per cent in income tax because his taxable income ($21,000) is less than his basic and age tax credits (approximately $25,660). However, every additional dollar of taxable income he earns from his RRSP and RRIF will reduce his GIS by 50 per cent of his adjusted taxable income,” said Rempel. “For example, the minimum RRIF withdrawal would be about $13,000 a year, which would reduce his GIS by $6,500 to $5,500 a year.”He added, “The actual RRSP meltdown strategy involves borrowing to invest and using your RRIF to pay the tax-deductible interest. Liam may not have the tolerance for the risk or complexity involved.”In Liam’s interpretation of the strategy, he is thinking to just withdraw much faster, not borrow. Rempel said while Liam’s approach could work, it would require a significantly higher drawdown amount.“I believe the optimal annual amount to withdraw from his RRSP is $66,000, not $30,000 to $35,000,” he said.“It is aggressive to withdraw that much and will deplete his RRSP in about four years but it works because it would bring his taxable income up to $94,000 during these four years. This will provide the money to buy his new vehicle, maximize TFSA contributions and accumulate $90,000 in a tax efficient non-registered account,” he added.“Liam would lose his GIS completely for these four years and pay about $14,500 a year income tax. This means about two thirds of his RRSP would be taxed about 21 per cent, instead of the 50 per cent clawback. During this period, the bank would withhold about $20,000 of tax and he should get a refund for the $5,500 difference,” he said.“After the four years, he should get about $10,000 a year in GIS payments for the rest of his life and he will effectively be in a 50 per cent tax bracket. However, with tax-efficient investing, he should only have between $1,000 and $3,000 a year of taxable investment income.”If Liam does decide to go this route, Rempel recommended starting the strategy now and implementing it near the end of this year, at which point he can estimate his taxable income for the year to determine exactly how much to withdraw from his RRSP. “The longer his RRSP grows, the more tax and GIS he will lose when he withdraws it.”Keeping the mortgage and letting the money in his TFSA grow is good thinking, said Rempel. “Liam’s current investments should generate a long-term average return of about 5.25 per cent. He can renew his mortgage at 3.7 per cent, so it is better for him to keep the investments and the mortgage.”He added, “Before giving any money to his nieces and nephews, he should make sure he will be financially independent and never need financial help from his family.”*Names have been changed to protect privacy.Do you have a wealth building question for Family Finance? Email wealth@postmedia.com.Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.