Should you take extra RRIF withdrawals to increase your estate?

Most tax-efficient way to withdraw from a RIFF

When you convert your registered retirement savings plan (RRSP) into a registered retirement income fund (RRIF), there are minimum annual withdrawals that you must take each year thereafter. This conversion needs to happen no later than the end of the year that you turn 71.

Your minimum withdrawal is a percentage of the account value as of the end of the previous year, and it rises annually. While RRIFs have minimum withdrawals, there are generally no maximums, unless your account is a locked-in one that came from a pension plan.

A locked-in RRSP, arising from a pension plan, must be converted to a life income fund (LIF) or similar locked-in account depending on the federal or provincial jurisdiction of the pension from which the account arose.

Should you consider extra RRIF withdrawals?

It’s worth considering extra RRIF withdrawals, Anne. Although this concept may seem contrary to conventional advice about RRSPs, it may maximize the value of your estate.

Here’s an example to explain. While these facts may not match up perfectly with your situation, Anne, bear with me. Take this woman’s situation.

She is 80 years old and single. She’s a resident of British Columbia. She has $250,000 in a RRIF account. And she has a lot of available tax-free savings account (TFSA) room. She also expects 4% annual investment returns. Currently, she receives 75% of the maximum Canada Pension Plan (CPP) pension. And she receives the maximum Old Age Security (OAS) pension. As home owner, she has a modest spending of about $3,000 per month covered by CPP, OAS and RRIF withdrawals.

This hypothetical woman would have minimum RRIF withdrawals of about $16,000 in her 80th year, in 2025. But she could take about $27,000 out in total and still stay in the lowest marginal tax bracket in B.C., where the combined federal and provincial tax rates rise from 20% to 23%, at about $49,000 of income, and increase again to 28% at about $57,000 in income.

The extra after-tax RRIF withdrawals would help fund TFSA contributions of about $9,000 per year that would grow tax-free rather than tax-deferred in a RRIF.

If this woman died at age 90, she would have about $117,000 accumulated in her TFSA and $3,000 left in her RRIF. She has $120,000 in total investments. The tax at her time death would be virtually nil.

What if instead she just took the minimum withdrawals from her RRIF? She would not have extra cash flow to contribute to her TFSA. She would, however, have about $158,000 in her RRIF.

At first, you would think having $158,000 of investments would be far better than having $120,000 and your tax-deferral strategy—taking minimum RRIF withdrawals—was the better choice. However, you may be wrong.

When happens to your RRIF when you die

When you die, unless you leave your RRIF to your spouse, the full balance is taxable on your final tax return as income. If you die in January, your other sources of income could be modest. If you die in December, your estate will owe more tax.

In our hypothetical 80-year-old woman’s case, dying at age 90 could result in about $40,000 to $50,000 of tax payable on her RRIF, if she took only the minimum withdrawals. It would depend what time of year she died, what deductions or credits might be available, and so on. But whether she takes the minimum RRIF withdrawals or takes additional withdrawals and contributes the extra to a TFSA, the after-tax value of the investments could be roughly $120,000.

In a case like yours, Anne, if your income primarily comes from government pensions, and your RRIF is your primary asset other than potentially your home, there may not be a compelling difference between the two withdrawal strategies. If someone had a substantial RRIF, a higher income, or was younger and had more years to use low tax brackets, there may be an estate advantage to taking extra RRIF withdrawals.

Who to ask for advice—and what to ask

My mother became terminally ill in her 60s, Anne, and we knew her life expectancy was shortened. We strategically took extra RRIF withdrawals over a couple of years to try to minimize the tax payable on her estate.

The point of minimizing tax and RRIF withdrawals? A tax and estate strategy that includes extra RRIF withdrawals is situation-specific and depends on the fact pattern. But I am in favour of at least considering it.

If your financial advisor or accountant have not raised this concept with you, that does not mean they have not crunched the numbers for you, Anne. But it may be worth asking the question: Will extra RRIF withdrawals mean less taxes on my estate? Ask because most financial advisors focus on investments and most accountants focus on doing your tax return for the previous year. Lawyers who prepare wills may simply accept instructions from you as opposed to considering the tax implications of your estate plan. This is by no means a knock on any of those professionals, but you need to understand the limitations of any advice and ask the right questions.

If you manage your own investments or do your own tax returns, that means you are tasked with considering broader tax and estate considerations on your own as well.

Tax deferral may seem good in isolation, but tax reduction—over your entire life—may be a better goal.

Read more about estate planning:

What happens to a RRIF when the account owner dies? Can you transfer a RRIF to a TFSA—and what are the tax implications? RRSP to RRIF, and LIRA to LIF: How it all gets done How to cope with the RRSP-to-RRIF deadline in your early 70s

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