This & That: RRSPs & Retirement Edition
J Wrote: I am 63 years old, employed. Pensions: CPP and Company totaling approx. $1666/mo. I plan on retiring in 2 years. My mortgage is $144,500. RRSPS totaling $160,000. Question is when I retire do I pay off the mortgage so no more mortgage payments or do I withdraw $1000/month from the RRSP? I figured to pay expenses when retired, I would need an extra $1000 per month to sustain, and mortgage payment is $798/month. Does it come down to income tax payable?
Gail Says: If you pull all the money from the RRSP at once, you’ll add the total to your income in a single year, driving up your tax rate and losing a whopping amount of it. You’d be far better off tax-wise drawing only the $1,000 a month from the RRSP.
E Wrote: Is it beneficial to have an RRSP if you’re already enrolled in a defined benefit pension plan through work? This has been a source of much debate at work and I need someone to play referee. Personally, I have the notion that you would be taxed more at retirement and possibly be ineligible for government benefits with the RRSP and that a TFSA would be the way to go. Currently, our employer adds in $1.26 for every $1 we contribute to the plan (which is calculated as 6.9% of annual earnings up to the year’s maximum pensionable earnings, and 9.2% above that). I am 31 years old and haven’t decided on an RRSP vs TFSA (but have already contributed $22,500 towards the DB pension) and need your opinion as to which is the best route to go to supplement my retirement.
Gail Says: Like you I believe that if you have a heathy work retirement savings plan in place, you should be doing any additional savings inside a TFSA, to minimize your taxes at retirement. Reality is your RSP limit is affected by your contributions to a company pension plan anyway.
J Wrote: My husband and I are retirement age and both will have defined benefit pensions. We have good savings which we would like to access for travel and some fun stuff to provide extra income while minimizing erosion of principal. We are debt free and own our home. Our advisor (Assante) has suggested t- shares as an option. We’ve never heard of them and can’t find a lot of information on them except for institutions selling them. What do you think of them? Is there a better option? Help! We are at a critical change point in our lives and are stressed by this!
Gail Says: T-Class shares are just mutual fund units that are labelled “tax” class because of the high fund distribution that’s touted as being tax free. Most of the fund distribution is classified as a “return of capital” for tax purposes, which means it isn’t taxable. The thing is, if it sounds too good to be true, is probably is. So here’s the problem with T-class shares: Since income can’t be created out of thin air, that high distribution of income comes at a cost. If the fund is not generating enough income to fund the distribution, or there aren’t enough new buyers to drive up unit values the distribution isn’t sustainable and will reduce the value of the units over time. So the income comes at a cost: the depreciation of your asset’s value. Yup, that means the unit value of your investment will potentially go down so when you sell you’ll have a loss.
You might be better off figuring out how much you need a month to fund your fun and making a monthly withdrawal from your investment plan. So if you need an extra $1,000, you’d sell a $1,000 worth of units each month. Remember, you’d only be taxed on the appreciated value so if you bought those units for $900 and sold them for $1000, you’d only be taxed on the $100 appreciation; the rest would in fact be a rerun of capital.
Be careful of “switching” to T-class shares if there’s a commission of any kind that must be paid. If making the change will incur fees like a front-end or back-end load (names for commission), you should weigh that very carefully.
M Wrote: I have an RRSP question that I don’t seem to be able to find an answer to. My wife, 5 years younger than me, has a health problem and has been unable to work most of her adult life. As a result I have always contributed to a spousal RRSP for her. I hope to retire at 60 (she’ll be 55). I know there is a 3 year attribution rule, but my question is, if I have 2 spousal RRSPs do I have to stop contributing to both before I can withdraw money out of either or only the one I want to withdraw from?
Gail Says: Yes, the rule is “contribution to any spousal RSP.” If you make your contribution for the year by Dec 31 of that year, it’ll help with the timing.