According to a 2019 Sun Life survey, 44 per cent of Canadians are expecting to be working full-time at age 66 (Getty Images/RainStar)
It’s RRSP season again, when it’s time to consider whether maximizing your RRSP contribution this year makes sense in the long run.
For those nearing retirement (or newly retired), with limited time left to save, it takes some strategic thinking when contributing to, or withdrawing from, a Registered Retirement Savings Plans (RRSPs), especially if continuing to earn an income.
These days that’s more than likely the case, with 44 per cent of Canadians expecting to be working full-time at age 66, and almost half (47 per cent) feeling at risk of outliving their retirement savings, according to a 2019 Sun Life survey.
Here are three tips for handling your RRSPs, alongside other sources of retirement income, when extending your professional life.
1. GET TO KNOW THE LANDSCAPE
“Job one is figuring out what your needs are going to be at retirement,” says CPA Stefanie Ricchi of Balance the Five. “That’s what starts to pave the way for the decisions that you’re going to make.”
Regardless of whether you’re earning an income in your retirement years, the federal government allows you to make contributions to your RRSP until the year you turn 71 up to an annual limit based on your contribution room.
In the year you turn 71, you have until Dec. 31 to deal with your RRSP. Without action, the amount in the plan will be taxable. Most transfer the balance into a Registered Retirement Income Fund (RRIF) or an annuity.
Assuming your RRSP is transferred to a RRIF, you must assess how much income you need in retirement and set a withdrawal plan. You should keep in mind that minimum withdrawals are required (which can also be based off the age of a younger spouse). RRIF withdrawals must begin in the year after the RRIF is established. Keep in mind that, while RRIFs are available as early as age 55, you can’t convert them back to an RRSP, and, the earlier you convert, the higher the risk of running out of savings.
“The way the RRIF works, such that you have to withdraw a certain amount each year and the amount increases as you age, it can be a bit of a burden,” adds Bob Lai, a B.C.-based personal finance expert at tawcan.com.
Hence the importance in choosing the right RRIF withdrawal plan for your situation.
2. UNDERSTAND THE TAX IMPLICATIONS
When earning an income in your retiring years, and considering additional RRSP contributions, you should assess the long-term tax implications once you withdraw, weighed against your (and your spouse’s) other sources of retirement income, recommends Ricchio.
In addition to your usual sources of income, you must consider pension income, the Canadian Pension Plan (CPP) (which begins between 60 and 70 years old) and Old Age Security (OAS) (which begins between 65 and 70 years old).
Since these are pooled together as net income on tax returns, you risk being catapulted into a higher tax bracket and paying more tax with those additional RRSP withdrawals. Alternatively, instead of contributing to your RRSP, you could allocate those funds to a TFSA, where withdrawals later are tax free.
“My honest recommendation is to put [your situation] in front of a professional tax preparer, so they can walk you through scenarios,” says Ricchio. “Otherwise, it could be a shock, when you start drawing your pension and see the amount of tax you have to pay.”
3. AVOID A CLAWBACK
Retirement-age income earners must also be mindful of the Old Age Security Repayment (or clawback), says Lai, whereby if your net income exceeds the government’s income threshold, by 15 cents for every dollar made above the threshold must be paid back. Though CPP is not subject to a clawback, it is taxable, so the higher your income, the more tax owed on it and other income sources.
In summary, making RRSP contributions when earning an income in retirement may lower your net income (and tax rate) today, but those contributions could increase the taxes you pay down the line, potentially causing an OAS clawback and other credit reductions, once withdrawals are made. Consider other routes, including a TFSA, if you still have contribution room, suggests Lai, to ensure you’re taking the best route on your road to full retirement.
“It depends on your situation…and that will require a bunch of calculations to see what's the best tax efficient method,” he says. “There’s quite a bit of juggling that you have to do.”
KEEP UP THE MOMENTUM
Retirement planning is a work in progress. Look to these CPA Canada guides—The Procrastinator’s Guide to Retirement and A Canadian’s Guide to Money-Smart Living— for starting and building your savings.