Q. As a recent retiree, I am receiving CPP and OAS, and have a small company pension. As a resident of B.C., I am subject to tax of 5.06% for the first $40,707 of income. My projected taxable income for the 2019 tax year will be less than that—$30,500, including the RRSP withdrawal mentioned below.
After taking my first RRSP withdrawal of $12,000, I was shocked that 20% tax was withheld. I understand the current rate of RRSP withholding tax is 10% for withdrawals up to $5,000, 20% for withdrawals between $5,000 and $15,000, and 30% for withdrawals over $15,000.
Since the 2019 Canada Federal Tax Bracket for the first $47,630 is subject to a 15% tax rate for “Other Income” and much less for capital gains and Canadian dividends, can I apply for a Request to Reduce Tax Deductions at Source? Or, is there an alternate applicable method? And, how much of a reduction should I ask for?
A. Hi David, you are not alone: Many people are surprised at the taxes withheld on an RRSP withdrawal.
The concept of the RRSP is great in theory. You save while you are making money and you get a tax deferral. When you retire and start withdrawing funds, you won’t need a high income (and likely won’t have one), so therefore would pay less tax and the RRSP funds would last until you die.
The tax rules are clear. You can contribute to an RRSP until age 71, after which time you must move your RRSP over to a Registered Retirement Income Fund (RRIF). A RRIF is an account registered with the federal government that gives you a steady income in retirement.
During your work years, you put money into your RRSP to accumulate savings for retirement. In retirement, you withdraw money from your RRIF as retirement income.
A minimum amount of annual withdrawals from a RRIF are mandated based on the market value of your RRIF, and your current age. (For 2020, the minimum amount is being reduced by 25% in deference to the financial hardship many Canadians are experiencing due to COVID-19.) RRIF withdrawals are treated like income for tax purposes, but taxes are not withheld at source—which means you may pay more or less tax that year, based on your total income the year of the withdrawal. Unfortunately, there is no mechanism to apply for less tax to be withheld. But, there are two options you could consider.
The first option is to convert your RRSP to a RRIF sooner than age 71, so you have to take out less (and pay less in taxes) each year; you can do this starting at age 55. The RRIF is a collection of investments similar to an RRSP that you draw down by the mandated amount and, depending on how long you live after retirement, could run out before you die (because you started withdrawals early). Since you likely have other sources of income, this may not be a problem for you.
The second option is to convert your RRSP into an annuity. An annuity is a form of insurance that guarantees a fixed sum of money is paid to you each year for life or, for a specified amount of time. Annuity payments from an RRSP will be taxed as income in the year you receive them.
Both these options require a metaphorical crystal ball for you to see your future—which can be difficult. Failing that, I would suggest seeking professional advice to put a financial plan in place. With the complexities of retirement planning, I would also suggest that seeking a few hours of a retirement or tax planner’s advice to plan for a tax-efficient way to make RRSP and RRIF withdrawals is money well spent.
Theresa Morley, CAP, CA, is a partner with Morley Chartered Accountants in Barrie, Ont. Check out her blog.
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