If you’ve been saving diligently in your RRSP over the years, you may not realize you have to pay tax — maybe a significant amount — when you retire and withdraw on those savings. Kim Parlee talks to Treva Newton, a Tax and Estate Planner with TD Wealth, about developing a plan for those taxes now, before it’s time to draw on your savings.
Print Transcript
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- Lots of people have been saving and investing in their RRSPs over the years, but they may not realize that you still do have to pay tax, and maybe a significant amount, when those savings do get drawn upon. The good news is you may be able to alleviate some of the stress with some pre-retirement tax planning.
Treva Newton is a Tax and Estate Planner with TD Wealth. She joins us from Victoria for this Ask MoneyTalk. Treva, your question is, "What can I do now to protect my retirement savings from getting taxed?"
That is a good question. And the first thing I want to say is don't always let tax be the most important thing. Make sure that you have a good retirement and everything so that you're not focused just on tax. But your RRSPs, yes, if you have a large RRSP, it could have a large tax hit when you come to retirement or, of course, on death. So how do you manage this? It's going to be an individual circumstance as to how everybody manages it.
- So in terms of some of those things to think about, I know that you and I have talked about things like spousal RRSPs, or TFSAs, or other ways of structuring things. So let's start with the first one of those, the spousal RRSP. How does that work? And why does that help alleviate some of the tax burden?
- Right. So the spousal RRSP, those can be great. So a lot of couples, they have different income levels during their working careers. One couple may earn a lot more money than the other couple. Maybe one stayed home to raise kids, different types of careers.
So the spouse A, who's earning more income, what they use is part of their RRSP contribution room. And they contribute into a spousal plan so that their spouse will have an RRSP when it comes time to retirement. So the idea behind this is to split income so that in retirement you have more of an equal income between the two of you and not just heavily on the one spouse so that you're taxed at a higher tax rate.
- Are there any things you have to watch out, for example if the money gets withdrawn sooner than later, in terms of just from a tax perspective?
- Right. Of course CRA has plans in there to make sure that you can't just quickly change money from one spouse to the other. So it has to be in there for three years before you take the money out. Otherwise it will be attributed back to the spouse who put the money in.
- OK. TFSA, how can that help with tax planning?
- Right. So tax-free savings accounts are great. So it's not going to help as much for somebody who maybe is really close to retirement because they only started in 2009. So their contribution room may not be as high because there's a limited amount that you can put in every year. But somebody who's maybe 25 years away from retirement, it's going to be a really great part of your retirement plan. So it's really great to put money into it to try to max that out as much as you can.
And the other great thing is after retirement, you can keep putting money in, unlike an RRSP. So there's no time limit when you can stop contributing to it. And then, of course, when you take the money out, it isn't income for you. So it doesn't affect any of your taxes.
- That's why you're always smiling when we talk about TFSAs.
- [LAUGHS]
- OK, let's talk a bit about the order. I know you and I have spoken of this before. But at a high level, does the order to which you withdraw savings from various instruments affect your tax situation?
- Right. That is a whole other topic for that. But quickly, it really, like I said, depends on your individual circumstances. And there is logic to it. You really want to take a look at what your individual needs are and talk to somebody when it comes to that time to make sure you're doing it in the correct order for you.
- What about when an RRSP turns into a RRIF?
- Yeah, so at the age 71, the RRSP does turn into a RRIF. And you have to start taking it out on an annual basis at the age of 72. There's a minimum amount that you have to take out. And that's based on a percentage by how old you are and also how much money you have in your RRIF account. And every year, that percentage goes up. One thing you can do is use your spouse's age, which may help when the RRIF comes out, again, in order to have a little bit lower amount.
- I mean, I know when you have a RRIF and it converts, you have to take the money out. What if you don't need it? Are there any options?
- Yeah, so you have take it out. So what you can do is maybe put it into your tax-free savings account. Great place to fund it so that it does continue to grow tax-free. Or you put it into a non-registered account, as well. Again, the income, of course, is going to be taxable every year. But at least it's going to be savings for you.
- What should people do to figure out what's right for their situation, because there's a lot of options here?
- Yeah. So always what you need to do is go talk to your financial planner and make sure you get an individual plan put in place for yourself.
- Treva, thanks so much. If you have any questions, you would like to Ask MoneyTalk a question, you can send an email to moneytalk@td.com with "Ask MoneyTalk" in the subject line. Write your question. We'll find someone to answer it for you. And then you can find it on moneytalkgo.com.
[MUSIC PLAYING]
- Lots of people have been saving and investing in their RRSPs over the years, but they may not realize that you still do have to pay tax, and maybe a significant amount, when those savings do get drawn upon. The good news is you may be able to alleviate some of the stress with some pre-retirement tax planning.
Treva Newton is a Tax and Estate Planner with TD Wealth. She joins us from Victoria for this Ask MoneyTalk. Treva, your question is, "What can I do now to protect my retirement savings from getting taxed?"
That is a good question. And the first thing I want to say is don't always let tax be the most important thing. Make sure that you have a good retirement and everything so that you're not focused just on tax. But your RRSPs, yes, if you have a large RRSP, it could have a large tax hit when you come to retirement or, of course, on death. So how do you manage this? It's going to be an individual circumstance as to how everybody manages it.
- So in terms of some of those things to think about, I know that you and I have talked about things like spousal RRSPs, or TFSAs, or other ways of structuring things. So let's start with the first one of those, the spousal RRSP. How does that work? And why does that help alleviate some of the tax burden?
- Right. So the spousal RRSP, those can be great. So a lot of couples, they have different income levels during their working careers. One couple may earn a lot more money than the other couple. Maybe one stayed home to raise kids, different types of careers.
So the spouse A, who's earning more income, what they use is part of their RRSP contribution room. And they contribute into a spousal plan so that their spouse will have an RRSP when it comes time to retirement. So the idea behind this is to split income so that in retirement you have more of an equal income between the two of you and not just heavily on the one spouse so that you're taxed at a higher tax rate.
- Are there any things you have to watch out, for example if the money gets withdrawn sooner than later, in terms of just from a tax perspective?
- Right. Of course CRA has plans in there to make sure that you can't just quickly change money from one spouse to the other. So it has to be in there for three years before you take the money out. Otherwise it will be attributed back to the spouse who put the money in.
- OK. TFSA, how can that help with tax planning?
- Right. So tax-free savings accounts are great. So it's not going to help as much for somebody who maybe is really close to retirement because they only started in 2009. So their contribution room may not be as high because there's a limited amount that you can put in every year. But somebody who's maybe 25 years away from retirement, it's going to be a really great part of your retirement plan. So it's really great to put money into it to try to max that out as much as you can.
And the other great thing is after retirement, you can keep putting money in, unlike an RRSP. So there's no time limit when you can stop contributing to it. And then, of course, when you take the money out, it isn't income for you. So it doesn't affect any of your taxes.
- That's why you're always smiling when we talk about TFSAs.
- [LAUGHS]
- OK, let's talk a bit about the order. I know you and I have spoken of this before. But at a high level, does the order to which you withdraw savings from various instruments affect your tax situation?
- Right. That is a whole other topic for that. But quickly, it really, like I said, depends on your individual circumstances. And there is logic to it. You really want to take a look at what your individual needs are and talk to somebody when it comes to that time to make sure you're doing it in the correct order for you.
- What about when an RRSP turns into a RRIF?
- Yeah, so at the age 71, the RRSP does turn into a RRIF. And you have to start taking it out on an annual basis at the age of 72. There's a minimum amount that you have to take out. And that's based on a percentage by how old you are and also how much money you have in your RRIF account. And every year, that percentage goes up. One thing you can do is use your spouse's age, which may help when the RRIF comes out, again, in order to have a little bit lower amount.
- I mean, I know when you have a RRIF and it converts, you have to take the money out. What if you don't need it? Are there any options?
- Yeah, so you have take it out. So what you can do is maybe put it into your tax-free savings account. Great place to fund it so that it does continue to grow tax-free. Or you put it into a non-registered account, as well. Again, the income, of course, is going to be taxable every year. But at least it's going to be savings for you.
- What should people do to figure out what's right for their situation, because there's a lot of options here?
- Yeah. So always what you need to do is go talk to your financial planner and make sure you get an individual plan put in place for yourself.
- Treva, thanks so much. If you have any questions, you would like to Ask MoneyTalk a question, you can send an email to moneytalk@td.com with "Ask MoneyTalk" in the subject line. Write your question. We'll find someone to answer it for you. And then you can find it on moneytalkgo.com.
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